Description

 

Mohawk was last written up by Value1929 in October 2020. He initiated the memo at $100, and closed the position one month later at $130. Great timing! I will use my memo to make the case that Mohawk, at $175 one year later, has a path to become a $400 stock.

 

Mohawk is the largest flooring manufacturer in the world. With housing growth and cost restructuring, we believe Mohawk can expand current 12% EBIT margins back to 15% margins, which it last achieved in 2016-2017. At 15x $26 EPS in 2024, the stock would be $390/share in YE 2024 (+30% IRR from $175/share today), which discounted back to 2022 is a $320/share price target (+85% 1-year return).

 

 

 

Thesis

 

(1)   Margin recovery

 

       ·         Mohawk’s earnings could recover to 15% EBIT margins, +250bps above 12.5% consensus long-term estimates. Our EPS estimates are +30% above consensus as a result.

 

·         Margins fell from 15% peak margins in 2017 to 8% trough margins in 2020 due to factory under-absorption, raw material inflation, negative mix, covid shutdowns and LVT startup costs. The underlying cause was capital misallocation into building greenfield ceramic, laminate and carpet tile factories instead of LVT.

 

·         Margins recovered to 12% in 2021 due to growing volume, improving factory absorption, ceramic restructuring and positive price-mix.

 

·         Margins should continue to expand in 2022 and beyond, despite investor fears about peak margins and cost inflation. Mohawk is getting price to offset commodity cost inflation in every business, while continuing to drive productivity and manufacturing efficiencies.  

 

(2)   Participate in LVT

 

       ·         Mohawk currently sells $0.5bn of LVT (10% LVT market share, 5% of Mohawk sales). Their LVT import business is not well appreciated.

 

·         They are three years behind competitors, but gaining share. Their US domestic manufacturing ($0.2bn sales) is improving quality and benefiting from 25% import tariffs and higher container shipping costs. Their China LVT import business ($0.3bn sales) is profitable and growing rapidly.

 

·         Due to LVT’s growth, Mohawk’s Flooring North America segment is now outgrowing the market. Contrary to perceptions, the company is not declining or structurally losing share.

 

(3)   Flooring demand

 

       ·         Flooring is a big-ticket, discretionary, professionally installed category. The category is well positioned within building products.

 

·         Flooring demand is driven by existing home sales, which continue to be strong despite limited housing inventory. Existing home sales should be strong in 2022: interest rates are low, home prices are appreciating, and housing affordability is still good. Home sales have been good despite a lack of inventory, which should improve as homeowners become more willing to list homes post-covid.

 

 

 

Mohawk background

 

Mohawk is the largest flooring manufacturer in the world.

 

·         $12bn market cap, $13bn enterprise value, $90mm ADV.

 

·         Mohawk started as a carpet mill in 1878. Its modern history began in 1992, when it went public and used its equity to roll-up the carpet industry. The stock has a +11% total return per year since IPO.

 

·         The company expanded to other flooring categories in the 2000s, buying Dal-Tile in 2001 ($1.6bn, ceramic tile) and Unilin in 2005 ($2.6bn, laminate). The flooring roll-up strategy picked up after the financial crisis, with 13 acquisitions for $3.7bn in 2012-2018. The biggest acquisitions were Marazzi in 2012 ($1.5bn, ceramic tile) and IVC in 2015 ($1.2bn, laminate).

 

·         CEO Jeff Lorberbaum joined Mohawk in 1994, when the company acquired his parent’s Aladdin Mills. He currently owns 11% of the company (worth $1.2bn at market prices).

 

Mohawk is vertically integrated into manufacturing, distribution, transportation and some retail stores. We are particularly attracted by their distribution and transportation infrastructure.

 

·         Manufacturing. 62 manufacturing plants around the world (27 North America, 28 Europe, 7 other). Flooring is a low value-to-weight product (~$1 per square foot at manufacturers prices), driven by distribution economics.

 

·         Distribution. 340 distribution points, 1,600 sales representatives. Their US distribution network is built around trucking products out of their Dalton, Georgia manufacturing hub. In the US, flooring is sold through specialty stores (55%), contractors (25%) and home centers (20%). There are tens of thousands of mom & pop flooring specialty stores, in contrast to other building product categories which sell primarily through Home Depot and Lowe’s or directly to homebuilders. Mohawk and Berkshire Hathaway’s Shaw Floors are the only two flooring companies with nationwide distribution infrastructure.

 

·         Transportation. 750 trucks, 2,500 trailers. Mohawk would be the 5^th largest standalone trucking company!

 

·         Retail. Ceramic has 280 retail stores in the US, 360 in Russia for the Daltile and Marazzi brands.

 

The company, with $10bn revenue, reports through three segments:

 

·         Global Ceramic, 35% of revenue, 30% of earnings. $3.5bn revenue ($2bn US, $1.5bn Int’l). Mohawk has 50% market share in the US ceramic market, competing against imports.

 

·         Flooring North America (“FNA”), 40% of revenue, 20% of earnings. $4bn revenue (~$2.5bn carpet, ~$0.5bn LVT, ~$0.4bn laminate, ~$0.2bn hardwood). Mohawk has 35% market share in the US carpet market (3 player oligopoly with Shaw Floors and Engineered Floors) and 10% market share in the fast growing LVT market.

 

·         Flooring Rest of World (“FROW”), 25% of revenue, 50% of earnings. $2.5bn revenue. Leading positions in Europe (IVC acquisition in 2015), Brazil (Eliane acquisition in 2018), and Australia (Godfrey Hirst acquisition in 2018). Despite being half of earnings, this segment is rarely discussed.

 

Mohawk has transitioned from roll-up to growth to restructuring story.

 

·         Roll-up (1992-2015). Mohawk’s business model is to bundle new flooring categories into their last-mile distribution network. After consolidating the carpet industry, they expanded into ceramic tile (Dal-Tile, Marazzi) and laminate (Unilin, IVC). The company always had modest organic growth (+5% per year average, even in good days), but acquisitions added +5pts per year and EBIT margins expanded +125bps per year, so earnings grew rapidly. The company spent ~$300mm capex per year (5% of sales) on brownfield factory modernizations with very high returns on capital, which drove most of the margin expansion.

 

·         Growth (2015-2018). With no major acquisitions left and limited brownfield opportunities, but unwilling to return capital to shareholders, Mohawk pivoted to ill-advised organic growth. It spent ~$800mm capex per year (8% of sales) on greenfield factories all over the world, adding $1.2bn revenue capacity off a $10bn revenue base.

 

·         Restructuring (2018-2020). Three years later, revenue was still $10bn. The extra capacity was sitting unused. Factory capacity utilization fell from ~85% to ~70%, and margins collapsed. The company stopped building greenfield plants. Mohawk closed old plants to right-size the manufacturing footprint and restore margins.

 

·         Recovery (2021-today). Mohawk’s capacity is sold out, they are getting price in excess of cost inflation, and outgrowing a robust flooring market.

 

The stock has been controversial, to say the least.

 

·         From 2011-2017, Mohawk was considered a “quality compounder”. Earnings grew from $3 to $14 (+20% per year), with consensus estimates that the company could earn $22 by 2020 with capital deployment. The stock increased from $50 in 2011 to $280 in 2017 (+35% per year), trading at a 20x earnings at peak.

 

·         Since 2018, Mohawk has been considered “structurally broken”. Earnings fell from $14 to $8; the stock fell from a peak of $280 to $60 in March 2020.

 

·         We believe Mohawk is neither a quality compounder nor structurally broken – it is a cyclical building products stock! In the upcycle, the market confused cyclical earnings growth for structural quality; in the downcycle, it has done the same. We are now entering a new housing upcycle, during which we anticipate Mohawk’s earnings and sentiment will improve.

 

Mohawk EPS estimates

 

Green= 2018; Red = 2019; Yellow = 2020; Orange = 2021; Blue = 2022

 

 

 

 

US flooring market

 

The US flooring industry has grown +5% per year over the last decade.

 

·         Carpet (40% of industry sales) has grown +2% per year, as it loses share to hard surfaces. This is a secular trend that has existed for 30 years. Carpet now mostly exists inside bedrooms and offices as a replacement product.

 

·         Ceramic (15% of sales) had grown +8% per year, before slowing in recent years. The most common flooring product globally due to its low manufacturing cost (other countries don’t have much carpet, hardwood or LVT), ceramic has a small share in the US market due to higher labor and installation costs.

 

·         LVT (“luxury vinyl tile”) is a new technology which has grown +30% per year, from 4% share initially to 20% share today. LVT’s growth has crowded out the rest of the flooring marketing. More on this below.

 

·         Hardwood (15% of sales, 8% of volumes) has grown +7% per year. Hardwood is a niche product because of its high prices. Due to tariffs on imported lumber and industry excess capacity, it is not profitable for US manufacturers.

 

·         Laminate and vinyl (8% of sales) have +0% growth. With very low prices, they are used primarily in residential replacement for multi-family and entry level homes. They were the first category to be displaced by LVT.

 

·         Stone (5% of revenues) has grown +5% per year. It is a niche product sold through separate distribution channels.

 

The flooring market slowed in 2018-2019, which contributed to Mohawk’s fall from grace.

 

(1)   Housing market slowed. With rising interest rates (30-year mortgages rose from 3.7% to 4.8%), the housing market stalled: existing home sales slowed from +2% in 2017 to -3% in 2018. The flooring market follows existing home sales with a 3-6 month lag, so flooring volumes slowed from +5% in 2018 to -2% in 2019.

 

(2)   LVT growth accelerated. LVT’s growth surprisingly accelerated off a larger base, from +30% growth in 2017 (+0.5mm sqft off a 1.6bn sqft base) to +45% growth in 2018 (+1bn sqft off a 2.1bn sqft base). This +4pt growth contribution (= +45% x 9% LVT market share in 2018) crowded out the flooring market’s growth, so the industry ex-LVT only grew +1% in 2018 and declined -6% in 2019.

 

(3)   Imports increased. With a weak dollar, the USD landed cost of imports fell from 2012 to 2018. Import volumes have been growing +10% per year, increasing share from 35% to 50% of the US flooring market. Consequently, domestic production fell -4% in 2018 and -5% in 2019.

 

 

 

 

Source: Flooring Covering Weekly statistical reports, which are free and publicly available on floorcoveringweekly.com

 

 

 

LVT

 

Luxury vinyl tile has been growing rapidly.

 

·         LVT is a vinyl-based product with the visual aesthetics of wood or tile. Consumers like its appealing visual aesthetics, low price point, durable quality, water-resistant features and ease of installation.

 

·         LVT technology has gone through several iterations. It started as flexible LVT (which Mohawk’s IVC actually invented and patented), before moving into higher-quality rigid core technologies using different substrates such as stone plastic composite (SPC) and wood plastic composite (WPC).

 

·         LVT has been growing +30% per year, from $0.7bn sales in 2012 (4% share) to $5.3bn in 2020 (20% share).

 

Despite inventing the product, Mohawk was late to LVT.

 

·         Mohawk missed LVT. They built the wrong LVT product (flexible instead of rigid), they didn’t procure enough of it (late to importing), and instead spent capital on products the market did not need (building new ceramic, laminate, vinyl and carpet tile facilities, which the company is now shutting down two years later). This was a capital allocation mistake around a technology shift.

 

·         Mohawk did not expect LVT to grow this quickly. Previous product inventions like ceramic, vinyl sheet and laminate had slower growth (10 years to maturity) and lower ultimate penetration (15%, 5% and 3%, respectively). Consequently, they planned for a smaller LVT market than was eventually realized.

 

·         IVC invented LVT in Europe, where they now have three LVT plants. After acquiring IVC in 2015, Mohawk tried to bring the technology to the US. They announced a new $100mm manufacturing facility Dalton, Georgia in April 2016, with completion planned for Q4 2017. The factory was delayed several times – by the time it came online in late 2018, LVT technology had advanced from flexible to rigid core. Mohawk tried retrofitting the plant, but encountered quality issues, which have persisted through today.

 

·         Mohawk was so focused on domestic manufacturing that they were late to importing product from China, which is where 90% of LVT comes from – they had not planned on needing to supplement their domestic volumes. By the time they tried in 2018, Chinese LVT production was sold out, and Mohawk could not get a full allocation. Their sourcing capabilities improved only by 2019, and our channel checks suggest their import logistics capabilities are still several years behind competitors.

 

·         Shaw Floors faced the same problem of changing LVT technology. They responded by shutting down their half-built first-generation LVT plant in the US, and moved to a China sourcing model after acquiring US Floors in October 2016. They now have 35% market share in LVT imports and record profitability.

 

We believe Mohawk will participate in LVT. They currently have ~$0.5bn LVT revenue (10% product market share).

 

·         Manufacture. Mohawk has two plants in Dalton, Georgia with $500mm of revenue capacity generating $200mm revenue. It has recently started building a third line.

 

·         Import. Mohawk imports ~$300mm of LVT. This is underappreciated.  

 

o    The company has told analysts that their imported LVT business is larger than their domestic production. Since domestic product is $200mm, we estimate imports are ~$300mm (60% of LVT sales). Our channel checks have variously estimated that Mohawk’s import position is 50-80% of their LVT sales.

 

o    In Q1 2020, Mohawk received a $13mm rebate for their imported LVT sold between September 2018 and November 2019, when the click LVT tariff was rescinded. That implies imported LVT sales were $52mm (= $13mm / 25% tariff), but Mohawk says they avoided most of the tariff by pre-buying LVT imports. Floor & Decor, a retailer with $440mm LVT sales in 2019, received a similar $13mm rebate.

 

o    We believe LVT imports currently have 10-15% contribution margins, above the FNA segment average.

 

·         Mohawk has been growing in-line with the market since 2019, which indicates it is participating in LVT.

 

o    Comparing Mohawk’s FNA organic growth with publicly traded manufacturers (Tarkett, Interface) and retailers (Tile Shop, Lumber Liquidators), Mohawk has grown in-line with the market in 2019-2020 after losing share in 2018. See the appendix.

 

·         Mohawk will participate in LVT because it is a distribution and transportation company, not just a product manufacturer. Flooring products are commoditized (would you pay more for a Karastan rug versus a store’s private label brand?), and once LVT becomes commoditized (technology stops changing, manufacturing becomes oversupplied), Mohawk will drive last-mile distribution economics as it has for the last 30 years.

 

Mohawk margins

 

Mohawk currently has 12% EBIT margins.

 

·         After peaking at 15% EBIT margins in 2017, Mohawk’s margins collapsed to 8% in 2020. See detailed bridge below. The -700bp margin decline has come from Global Ceramic (-950bps) and Flooring NA (-920bps), while Flooring ROW (-90bps) has performed better.

 

·         Consensus expects long-term EBIT margins to recover to only 12.5% margins. We expect EBIT margins to expand to 15% margins (Global Ceramic 12%, Flooring NA 12%, Flooring ROW 19%).

 

·         We believe the company has a ~15% margin entitlement, given its vertical integration into distribution (5% margins), transportation (5% margins) and retail (1% margin contribution = 10% margins x 10% of the business). Their manufacturing business, which is currently money losing, should have positive contribution margin after it is restructured.

 

Mohawk Adjusted EBIT margins

 

 

 

 

EBIT dollars fell by -$670mm on flat revenues from 2017 to 2020. EBIT margins were cut in half!

 

(1)   Factory absorption, -$180mm. Rarely discussed, but one of the largest drivers of Mohawk’s earnings.

 

·         In 2017, inventories grew by +$270mm as Mohawk ran newly opened plants for demand that didn’t exist (inventory days grew +10%, from 100 to 110 days as finished goods inventory built up in warehouses). They were over-earning due to factory overhead absorption (e.g., plants running at 95% utilization instead of 85%), as costs were allocated to inventories that sat unsold in warehouses.

 

·         In 2020, inventories shrank by -$440mm as Mohawk purposefully reduced their inventories (inventory days fell -17%, from 114 to 95 days). They are now under-earning (e.g., plants running at 70% utilization instead of 85%), which has been a painful but necessary restructuring to right-size inventories. Inventory days are now at all-time lows, see chart below.

 

·         Sales did not change during this up-then-down, just factory production levels. The inventory swing from +$270mm to -$440mm was a -$710mm reduction in inventories over 3 years. At a 25% incremental margin, that is worth -$180mm EBIT (-200bps of margins).

 

(2)   Depreciation, -$150mm. The ~$2bn of growth capex spent in 2016-2018 was essentially wasted. The remnants are -$150mm of higher annual depreciation running through the income statement. EBIT margins fell by -700bps, EBITDA margins by “only” -550bps.

 

(3)   Inflation, -$260mm. Mohawk’s carpet business is essentially an oil refiner, turning oil-derivatives such as nylon and polyester into carpet. Higher oil prices and transportation costs in 2017-2019 were a cost headwind that Mohawk was not able to pass on to its customers in an oversupplied market.

 

(4)   Mix headwinds, -$140mm. The flooring industry successfully put through prices increases in 2018 to offset raw material inflation (see PPI chart below), but customers responded by trading down into lower mix products. In carpet, they moved from broadloom to polyester; in ceramic, they moved into lower priced offerings.

 

(5)   Covid shutdowns, -$160mm. Q2 2020 revenue was down -20% (-$535mm decline), which at 30% decremental margins had a -$160mm EBIT impact.

 

(6)   LVT plants, -$40mm. Frequently discussed, despite not being very material. Mohawk’s two LVT plants lost -$40mm in 2019, they expect them to reach breakeven in early 2021. This will be important for MHK’s narrative.

 

EBIT Bridge ($mm YoY)

 

 

Source: Mohawk 10-Qs and 10-Ks. “Volume” and “shutdown costs” are related concepts. Our categories of “covid shutdowns” and “factory absorption” would fall into these buckets.

 

 

 

Mohawk inventory days

 

 

 

 

Flooring prices (% YoY)

 

 

Source: PPI

 

 

 

 

 

European Ceramic

 

European ceramic ($700mm revenue sub-segment, 7% of Mohawk sales) is exposed to higher natural gas costs (10% of sales, $70mm COGs), where European natural gas costs are up 3-5x (-$200mm EBIT headwind).

 

The market is concerned about Mohawk’s cost inflation, especially after the Q4 guidance miss on EU ceramic (-$25mm EBIT impact) and negative / vague Q1 margin comments (up to -$50mm EBIT impact). But consensus Q1 estimates have been cut sufficiently, so we believe the company is set up to return to beat-and-raise quarters (as they did from Q3 2020 to Q2 2021, before this Q3 2021 hiccup).

 

 

European Natural Gas (FEFNW1 Index)

 

 

 

 

Our view is that Mohawk is offsetting cost inflation with price:

• Carpet: prices up +12-15% Y/Y, with most recent increase in August. Next increase is January 1, which we estimate should be margin expanding. (Shaw tells us: “We believe we’ve covered the current environment and then some, we are trying to take advantage of the situation a little bit”).
• LVT: prices up +10-12% Y/Y. Mohawk announced a +12-15% price increase on October 1 according to one source, +5-6% according to the second source. Shortages of LVT (MHK 15% market share) are pushing customers into laminate (MHK 80% market share).
• Ceramic: next US price increase is +10% on January 1. European natural gas costs leading to higher US ceramic prices, because US is 66% imported ceramic, much of it from Europe. Mohawk has a $0.7bn EU ceramic business, but a $2bn US ceramic business, so they’ll actually be a net beneficiary of this.
• Every product is currently sold out. 2022 outlook described as “very positive”, with +3-5% ceramic volume, +15-20% LVT volume, +2-3% carpet volume and very strong laminate volume, which blends to +HSD-LDD revenue growth (MHK consensus currently +5%).

 

 

 

Valuation

 

At $175/share, MHK trades at 7x our 2025 earnings estimate of $26/share.

 

·         On consensus 2022 estimates, MHK trades 11x earnings, 14x FCF, 6x EBITDA. Our EPS estimates are +10% above consensus, so MHK is trading at 10x earnings, 13x FCF and 6x EBITDA on our estimates.

 

·         MHK is the only building products stock trading at a significant discount to its historical valuation. Over the last decade, MHK traded at 16x earnings on average. At 11x today, MHK is one of the few companies in any industry trading below their historical average P/E multiple.

 

·         FCF is strong. FCF conversion averaged only 50% in 2010-2018, and was part of the bear case at the time. It averaged 160% in 2019-2020 as inventories destocked, and should average 100-105% in the future.

 

Mohawk has a +30% base case IRR (+80% 1-year return).

 

·         Base case target price of $390/share in YE 2024 (+30% IRR from $175/share today), based on $26/share EPS x 15x multiple – earnings growth and revision to historic multiples. Discounted back two years at 10%, the 1-year target price to YE 2022 is $320 (+85% upside). MHK was near these levels in 2018 – the stock peaked at $284/share.

 

·         Bull case of $500/share (+40% IRR), assuming the multiple recovers to benchmark building product peers (FBHS and MAS both trade at 18x today). $28/share EPS x 18x multiple.

 

·         Bear case of $170/share (-5% IRR), assuming earnings decline by -20%. $13/share EPS x 12x multiple.

 

 

 

 

 

 

MHK NTM P/E multiple

 

 

 

 

 

Building Products comparables

 

 

Risk factors

 

·         SEC investigation. The SEC and DOJ are investigating Mohawk for fraud. On June 29, 2020, a class action lawsuit used whistleblowers to allege that Mohawk was fraudulently reporting sales, using a “Saturday Scheme” to fictionally ship flooring to customers on the last day of the quarter. The SEC and DOJ started investigating the allegations in July. CEO Jeff Lorberbaum must have known about the fraud, so he will be fired, and Mohawk will restate their historical financials. You can’t trust their numbers.

 

o    Mitigant: If true, this was fraud against the company, not fraud by the company. The lawsuit alleges that Brian Carson, the former president of FNA, led the scheme. He was fired in November 2018. We have talked to dozens of former executives, not one believes Jeff Lorberbaum was involved. Brian Carson has since found employment as the CEO of AHR Products (Armstrong Flooring’s former wood flooring division), suggesting his new private equity employer doesn’t believe the accusations.

 

o    Mitigant: If true, we believe this is immaterial. The lawsuit alleges the channel stuffing amounted to “four to five million pounds of product”, which is <1% of sales. We have found nothing unusual with accounts receivable during the alleged period, which is how fictional sales would appear in the accounting. If Mohawk were cooking the books, putting a million pounds of flooring physically in a truck on March 31 and unloading it on April 1 is not the best way to do it! FCF conversion has been ~200% in 2020, which supports the quality of their accounting.

 

o    Mitigant: The allegations have no merit. The company filed a response to the lawsuit on October 27 disputing the claims. With their Q3 earnings release on October 29, 2020, the company responded: “With the assistance of outside legal counsel, the Company’s Audit Committee completed a thorough internal investigation into these allegations of wrong doing and concluded that the allegations are without merit. The Company is cooperating fully with the ongoing governmental investigations and will continue to vigorously defend against the lawsuit, which the Company does not believe has merit.” Mohawk’s Board authorized a $500mm buyback with Q3 earnings, which they could not do if they planned to restate financials.

 

·         Raw material inflation. Oil prices are up from $40/bbl to $80/bbl, which will lead to raw material inflation. Mohawk’s margins were squeezed the last time commodity costs increased in 2018, they will be squeezed again.

 

o    Mitigant: The flooring market is stronger in 2022 than it was in 2018, which will allow the flooring market to pass commodity cost inflation higher prices. Recent carpet price increases have been accepted by the market.

 

·         Mohawk losing market share. Mohawk only has 5% market share in LVT (according to some bears), below their 25% flooring market share (50% in ceramic, 35% in carpet). As ceramic and carpet are replaced by LVT, Mohawk’s revenues will secularly decline.

 

o    Mitigant: As discussed in the LVT section, Mohawk is (1) participating in LVT and (2) LVT won’t capture 100% of the market. Mohawk’s share of the LVT market has been increasing.

 

o    Mitigant: Mohawk has been growing with the market the last two years.

 

·         Specialty stores losing share. Specialty stores (55% of sales) are losing share to home centers (20% of sales). Mohawk has higher margins and market share with specialty stores.

 

o    Mitigant: This is true, but the trend is slow moving (0.5pt per year) and will take decades to play out. There is a limit to how much square footage Home Depot and Lowe’s can devote to flooring.

 

o    Mitigant: Cyclically, specialty stores will recover in 2022. Home Depot and Lowe’s could stay open during covid while their smaller competitors were closed. Those smaller stores have since reopened and are benefiting from pent-up demand.

 

·         Capital allocation. Mohawk has an uncertain capital allocation strategy. CEO Jeff Lorberbaum wants to grow through M&A and capital spending, he is philosophically opposed to buybacks or dividends. He is a bad capital allocator who blew the company up with his 2015-2018 round of capital spending.

 

o    Mitigant: Mohawk has a good track record with acquisitions, but there is nothing large left to buy. In the US, Mohawk has 25% market share, Shaw 20%, imports 40%, and a tail of small domestic manufacturers 15%. The small companies are either poorly performing (Armstrong, Mannington, Tarkett, Dixie Group) or not for sale (Engineering Floors). Interface (TILE Equity), which sells carpet tiles to offices, could be an interesting target but too small to move the needle ($0.6bn market cap). There are acquisition opportunities overseas, but they are also small.

 

o    Mitigant: Mohawk has increased their share repurchases. They repurchased $274mm in 2018, $100mm in 2019, $189mm in 2020 and $473mm in YTD 2021, cumulatively shrinking the share count by 8%. They recently approved a $500mm buyback authorization (5% of market cap).

 

o    Mitigant: Mohawk would be a good target for private equity. The company is under-levered (0.5x net debt is below 2x historical average), cash generative ($0.9bn FCF per year) and low multiple (trading at 7x LTM EBITDA today). A financial buyer could put 5x leverage on the company and still generate 20% cash-on-cash returns with no growth or multiple expansion needed.

 

Appendix A: Building Products companies

 

 

 

 

 

Appendix B: Flooring companies

 

 

 

 

Appendix C: Housing data

 

 

 

 

Homebuilder Orders

 

 

Source: Publicly traded homebuilders (DHI, LEN, KBH, TOL, PHM, MTH, MDC, NVR, TMHC, BZH)

 

Disclaimer: The author of this memorandum presently has a long position in securities of this issuer and may trade in and out of these positions without notice.  This memorandum is for discussion purposes only and is not intended to be, nor should it be construed or used as, financial, legal, tax or investment advice or a general solicitation.  This memorandum is as of the date posted, is not complete and is subject to change. The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates. Certain information has been provided by sources believed to be reliable, but has not been independently verified and its accuracy or completeness cannot be guaranteed and should not be relied upon as such.

 

 

 

 

Catalyst

- Q4 beat-and-raise

- 2022 EPS +10% above consensus

- Continued share repurchases, deploying balance sheet capacity