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Morningstar | Masco Expects to Conclude Its Strategic Review of Its Cabinetry and Windows Businesses in June

We think Masco’s financial performance over the last five years has been as much of a self-help story as it is a story of improving end markets. Masco almost entirely refreshed its senior executive management team in 2014. Since then, it has taken significant measures to build a stronger and more consistent business, including spinning off its more cyclical installation business to shareholders, executing on cost-reduction initiatives, realigning its cabinets business to focus on more profitable channels, and shoring up its balance sheet. However, Masco may not be done with its transformation. The company announced it will explore "strategic alternatives" for its cabinetry and window businesses. Management expects to complete the review by the end of June. In our view, this is a positive development for Masco because we had long viewed its plumbing and decorative architectural businesses as the firm's crown jewels, while Masco's cabinetry and window businesses have oftentimes been laggards that have been a drag on margins and returns on invested capital. The health of the housing market and repair and remodel, or R&R, spending in the United States are major drivers of Masco’s financial performance. After the spin-off of its installation segment in 2015, Masco reduced its exposure to new-home construction by almost 40% and increased its exposure to more resilient R&R end markets by 15% (sales mix is now 85% R&R and 15% new-home construction). If Masco does indeed divest its cabinetry and window businesses, we estimate the firm's overall exposure to the R&R market will increase to 89% of sales.Despite a disappointing year for United States housing construction in 2018, we remain bullish on new-home construction longer term. We project housing starts will reach over 1.4 million units by 2025. With an improving housing market, we also expect solid R&R spending, so we see a nice growth runway for Masco over at least the next five years as the company capitalizes on improving end markets and internal growth initiatives.