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Morningstar | Masco Announces Strategic Review of Cabinetry and Window Businesses

On March 1, Masco announced that it will explore "strategic alternatives" for its cabinetry and window businesses. Management expects to complete the review by the end of June. We will maintain our $44 fair value estimate and narrow moat rating until management completes its strategic review and the fate of the two businesses is announced.

In our view, this is a positive development for Masco, and clearly the market agrees, as evidenced by the strong uptick in Masco's stock price during the morning trading session March 1. We had long viewed Masco's plumbing business (whose top brands include Delta and Hansgrohe) and decorative architectural business (led by its Behr paint brand) as Masco's crown jewels, while the firm's cabinetry and window businesses were oftentimes laggards that dragged on margins and returns on invested capital. We don't believe Masco's cabinetry and window businesses enjoy nearly the same level of brand equity and pricing power as its plumbing and decorative architectural businesses. Furthermore, Masco's cabinetry and window businesses have more exposure to the more cyclical new residential construction market, and given the fairly large ticket prices of cabinets and windows, we think purchases of these products are more likely to be deferred during an economic slowdown than plumbing fixtures and paint.

If Masco sells the cabinets and windows segments, its top line will shrink by $1.7 billion, but its profitability will improve. Based on our pro forma analysis of Masco's 2018 results, excluding cabinets and windows (but still including all of Masco's corporate expense) increases the firm's 2018 adjusted operating margin by 200 basis points to 17.1%. Masco's overall exposure to the more stable repair and remodel market will also increase from 85% of consolidated sales to 89%.