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MASCO CORP MAS
February 03, 2023 - 6:48am EST by
lalex180
2023 2024
Price: 56.00 EPS 3.61 3.94
Shares Out. (in M): 232 P/E 14.9 16
Market Cap (in $M): 12,973 P/FCF 14.2 14
Net Debt (in $M): 2,599 EBIT 1,267 1,332
TEV (in $M): 15,571 TEV/EBIT 0 0

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Description

MASCO CORP (MAS US) – LONG @$56

Disclosures

I and/or others I advise hold a material investment in Masco. Everything expressed here is only my own opinion, it should not be relied upon, nor should be considered investment advice. Always do your own independent research.

Background

  • Masco is a US based manufacturer and distributor of branded home improvement and building products, primarily faucets and paint, focused on the repair and remodel segment of the housing industry. 

  • During the US housing crisis of 2008/09, the company went nearly bankrupt due to excessive debt and exposure to new construction; post the crisis, a new management team transformed Masco into a less volatile and higher returns business, shedding its most cyclical assets and focusing on its two higher returns and more stable plumbing and decorative paint businesses.  

  • The business today sells primarily low-ticket items, that are defensive in a residential housing downturn, earn high returns (18-19% EBIT margin) with low capital intensity (2.5% capex/sales). 

 

Investment Thesis

  • Transformed company post GFC: since 2013 Masco started a process of overhaul of its portfolio, improving its returns and stability profile by divesting its more cyclical and lower margins businesses (Insulation installer, Cabinetry and Windows) whilst retaining its higher returns and more stable Paint and Plumbing businesses.

  • Portfolio tilted towards less cyclical business: the company also tilted its exposure towards the repair & remodel markets (90% of group) and reduced its new construction exposure to only 10% of the group

  • Paint and Plumbing are high quality growing businesses: both paint and plumbing own strong brands, sell low ticket items, have leading distribution capabilities and generate high margins (18%+) with limited capital intensity (capex/sales 2.5%); furthermore, they benefit from secular tailwinds such as aging of the housing stock and demand for smart and energy efficient home products. 

  • Savvy capital allocators: on top of improving the company’s business portfolio, management has repurchased 25% of outstanding shares in the last 5 years; noticeably management long-term incentives scheme is tied to increasing 3-years group ROIC, which averaged 17% in the last 3-years. 

  • Solid financial algorithm and high returns: the business should grow topline between +4-8% p.a. broken down as +3-5% organic and +1-3% bolt on acquisitions; overall EPS should compound at around +10% driven by an additional +2-4% annual buyback; capital intensity is low (2-2.5% capex/sales) and CFROI is high (>20%). 

  • Attractive valuation: the stock performed YTD similarly to more cyclical names exposed to housing (housebuilders), despite its high exposure to more stable repair and remodel end markets (c.90% of revenues); trades on 14x P/E and a FCF yield of 7.0% with FCF/share growth >10% p.a.

 

Key Risks

  • Customer concentration: the Home Depot is the company’s largest customer, accounting for 36% of sales, through its exclusive distribution in the US of Masco’s paint Brand Behr.

    • Mitigants: The Behr-Home Depot relationship on decorative paint has been enduring for 40 years and is symbiotic: HD benefits from the exclusivity of a popular high performing brand to drive store traffic, whilst Behr benefits from HD’s world class distribution network. 

  • Raw material inflation: like other coatings company, Masco is exposed – in the short term – to volatility in raw-material prices, particularly oil derivatives and TiO2.

    • Mitigants: Over the mid-term, Masco’s strong pricing power allows it to recoup cost inflation and restore its high teens EBIT margin. 

  • Cyclicality: the company is still exposed to the housing cycle, particularly in the US (80% of sales).

    • Mitigants: importantly, the company is heavily exposed to the more stable repair and remodel end markets than in the past. 

Investment Thesis in Charts

Group CFROI improved since 2014 through divestments and focus on higher margins Plumbing and Paint.

                   

The group is more resilient, with 90% exposure to repair & remodeling and a focus on low-ticket items.

           

The stock still trades on undemanding P/E, despite a much-improved returns profile. 

Brief History

  • The company was founded in 1929 by Alex Manoogian, the inventor of the world’s first single handle hot/cold faucet; the business was listed in 1936, as Masco Screw Product Company, selling parts to the automotive industry. Only in 1952 the business started to operate in the plumbing industry, as the founder designed first single-handle hot/cold faucets, now known as Delta. 

  • During the period 1996-2002, Richard Manoogian, son of founder Alex, went on an acquisition spree, over-stretching the business.

  • During the Great Financial Crisis (2007-2009) the company greatly suffered and the stock collapsed -80%.

    • From 2014, a new management team was put in place to overhaul and restructure the business, shedding the more cyclical and low margins part of the portfolio: 

    • In 2015, the company spun out Topbuild, a cyclical installer and distributor of insulation products.

  • In 2019-20, the lower margin windows and cabinetry businesses were divested respectively for $725mn (to MI Windows and Doors in Oct-19) and $1bn (to ACProducts Inc, in 2020). 

  • The benefits of the restructuring process post the 2008/09 recession, are well visible in the CS HOLT chart below, breaking down the evolution of Economic Profit by segment over time.

 

  • As of today the business is focused on two high margin, resilient end markets: Plumbing Products (60% of EBIT, 18% margin) and Decorative Architectural Products 40% of group EBIT, 19% margin). 
  • Importantly, even at the depth of the financial crisis, both Paint and Plumbing operating margins remained positive around 10%, whereas Cabinets and Windows fell into a large loss (-35% margins). 

 

 

Key Exposures

  • The business reports across two divisions, Decorative Architectural (or paint) and Plumbing; the former is slightly more profitable than the latter, but both earn margins well in the high-teens. 

 

  • Masco is primarily a North American business (c.80% of sales), exposed to the repair and remodeling end markets (c.90% of group).

  • The company operates 30 manufacturing sites in the US and 10 overseas, the latter exclusively for the plumbing business. Most of the international facilities are located in China, Germany and the UK. 

 

Historic Financials

 

 Industry Context 

  • From a macro standpoint, most US housing exposed stocks have suffered a significant derating since the Fed started to raise rates meaningfully, and US mortgage rates spiked. 

  • It is though important to bear in mind that new construction accounts for only 10% of Masco’s revenue; 90% of the group is exposed to the more resilient Repair & Remodel end market, which is underpinned by several secular tailwinds, such as ageing housing stock, favourable demographic, and increase demand for energy efficient homes.

  • Additionally, it is important o tbear in mind that the long-term housing fundamentals remain supportive in the US, as shown in the charts below.