Masco: Zacks’ Bull of the Day Play

Masco Corporation (MASAnalyst Report) is one the world’s leading manufacturers of branded home improvement and building products. The company has over 30 quality building products manufacturers in its family.

Approximately 81% of the company’s sales in 2014 were generated from operations in North America, primarily in the U.S. Around 19% of the company’s sales are generated outside the U.S., mainly in Europe.

The stock actually became a Zacks #1 Rank before they reported earnings on Tuesday October 27, as estimates rose ahead of their Q3 report. Tuesday’s 10% earnings beat might solidify that spot if analysts like what else they hear about guidance.

Masco Riding the Housing Boom

Masco operates through four primary business segments: Plumbing Products, Cabinets and Related Products, Decorative Architectural Products, and Other Specialty Products, which includes a full range of windows and doors, manual and electric staple gun tackers, staples and other fastening tools.

Adjusted Q3 earnings increased 26% year over year driven by strong margins, partially offset by unfavorable foreign currency. North American sales increased 3% year over year to $1.46 billion driven by growing demand for repair and remodeling, and new home construction products in an improving U.S. economy.

Masco’s net sales of $1.84 billion missed the Zacks Consensus Estimate of $1.89 billion by 2.7%. Revenues were flat from the prior-year quarter as sales growth in the Decorative Architectural Products and Other Specialty was mostly offset by unfavorable foreign currency and soft revenues in the Installation and Cabinet segments. However, excluding the impact of currency translations, organic revenues increased 4% year over year.

Margins Up, Cabinets Down

Adjusted gross profit grew 6.7% to $587 million. Adjusted gross margin improved 190 basis points (bps) to 31.9%. Adjusted operating profit was $257 million, up 15.8% from the prior-year quarter.

Adjusted operating margin increased 190 bps year over year to 14%, driven by increased operating leverage and solid cost controls. Operating margin increased 250 bps in North America to 15.9%. Operating margin however decreased 30 bps in international markets to 13.0%.

Cabinets and Related Products saw segment revenues of $253 million, which was a decline of 5% year over year owing to the exit of the low-margin direct-to-builder business, partially offset by strong sales growth of KraftMaid Cabinetry with home centers and dealers.

Adjusted operating profit of $19 million for the segment compared favorably with an operating loss of $7 million in the prior-year quarter, driven by higher operating efficiencies. Adjusted operating margin stood at 7.5% in the quarter, a complete turnaround from -2.6% in the prior-year quarter.

Waiting for More Analyst Reaction

Masco shares initially opened lower on Tuesday morning after this Q3 report as investors interpreted the results as mixed.

But buyers came in all morning and afternoon on strong volume pushing the stock up near its 52-week high at $28.59, which is not far from its 2006-07 highs above $29.

The rest of the week will tell us if the analysts see Masco’s earnings momentum carrying into 2016 on the strong US housing market. Keep an eye on the Zacks Rank to let you know where they stand.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money (FTM) portfolio.

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