EUR 850.00 For Business Accounts Only

Morningstar | Mohawk Had a Challenging 2018, but Capacity Additions Position the Firm for Future Growth

Mohawk Industries is a leading global flooring products manufacturer with a particularly enviable position in the United States., where it participates in the near duopolistic carpet market (along with Berkshire Hathaway-owned Shaw Industries) and enjoys leading share in most other product categories. Acquisitions have been a key component of Mohawk’s growth strategy, and the firm has completed over 40 since 1992, first consolidating the U.S. carpet market in the 1990s and later using acquisitions to expand into adjacent flooring categories and new end markets. Organic reinvestment has been another priority, and Mohawk has invested heavily in productivity and capacity expansion projects to drive growth and improved profitability. The company spent nearly $800 million on capital projects in 2018 to support over $1 billion in new sales capacity across a wide range of product categories, including high-growth luxury vinyl tile, or LVT. Mohawk’s productivity initiatives have had a meaningful impact on the firm’s improving profitability. Indeed, we calculate that productivity projects accounted for over $600 million of the $975 million increase in GAAP operating income between fiscal 2012 and 2017, as adjusted operating margins improved from 6.9% in 2012 to 14.9% in 2017.Mohawk's operating margins reached over 14% in fiscal 2016 and 2017, but the firm's profitability pulled back dramatically in 2018, with adjusted operating margin falling below 12% as the firm grappled with slowing end-market demand, rising input costs, increased import competition, unfavorable price and product mix, and startup costs related to manufacturing capacity additions. While we think it will be tough for Mohawk to return to and maintain the level of profitability it enjoyed in 2016 and 2017, we believe margins can certainly improve from here as inflationary pressures moderate and U.S. new residential construction and repair and remodel activity pick up. We remain bullish on the longer-term outlook for U.S. housing, which bodes well for Mohawk because over 60% of its sales are generated in the U.S., and an outsize portion of that is driven by residential replacement and new construction.