EUR 850.00 For Business Accounts Only

Morningstar | Masco Reports Solid 3Q Revenue Growth, but Challenges Remain; EPS Guidance Lowered Again

Masco's third-quarter reported revenue grew 8% year over year (4% organic) to $2.1 billion, which missed the consensus estimate by about $64 million. While the narrow-moat-rated company's adjusted EPS increased 25% year over year to $0.65, it too missed the consensus estimate (by $0.05). Like last quarter, Masco's EPS growth was mainly the result of a lower effective tax rate and a decreased diluted share count versus the year-ago quarter. Adjusted operating profit grew just 3% on an 8% increase in revenue, and adjusted operating margin contracted 70 basis points year over year to 15.2%. Management lowered 2018 full-year adjusted EPS guidance to $2.39 to $2.44 from $2.48 to $2.55 previously. Three main challenges were blamed for the lowered guidance: weaker demand from the do-it-yourself paint market, a soft international plumbing market, and cost headwinds in the cabinetry segment.

Still, there were plenty of bright spots during the quarter. North American plumbing sales were strong, up 9% year over year; Behr's professional paint business grew in the high single digits; the Kichler integration seems to be going well; and the cabinetry segment turned in a nice performance. Excluding the divestiture of the Moores business, cabinetry revenue was up 11% year over year, and the segment's operating margin expanded 90 basis points to 9.6% as volume gains more than offset higher costs and unfavorable product mix. Management also expects the cabinetry segment to achieve $80 million in run-rate revenue with Menards during the fourth quarter. Overall, we thought Masco's management team seemed much more upbeat about market trends than peer Fortune Brands' management team. After reviewing Masco's third-quarter results and forward-looking commentary, we didn't materially change our long-term outlook for the company and are therefore maintaining our $44 per share fair value estimate.

Masco's decorative architectural segment grew revenue 20% year over year, but much of this increase was due to the Kichler acquisition, which closed in March. Excluding the acquisition, segment revenue increased only 1% as growth from Behr's professional paint business and strong hardware sales were mostly offset by a decline in DIY paint sales. The segment's adjusted operating margin declined 220 basis points to 17.7% due to Kichler's lower margin profile.

The plumbing segment grew revenue 4% (5% excluding currency translation) as 9% growth in North America was partially offset by a 1% decline in international sales. Adjusted operating margin, which declined 50 basis points to 18%, was negatively impacted by rising input costs, mix, and enterprise resource planning investments.

Windows revenue declined 3% year over year amid a difficult prior year sales comparison (windows sales were up 12% year over year during the third quarter of 2017). The segment's adjusted operating margin fell 220 basis points to 9.6% primarily due to $5 million in incremental costs related to rightsizing the segment's workforce and new product launches. The $5 million of costs incurred during the third quarter were in line with management's expectations.