Fun with flooring, the case for the basics, looking at Mohawk Industries over the last three years

  • The chart shows the performance of flooring products company MHK, over the last three years
  • Since the stock’s trough in May of 2020, it has exploded higher, rising 156%
  • With reports from the Wall Street Journal, Marketplace, and others documenting that the US is short nearly 7 million housing units, there may be far more room to run…..

MHK Buy or Sell?

Please click here to see why our proprietary ranking model likes the stock and some simple reasons Mohawk, a maker of products for residential and commercial buildings, maybe a great candidate to research for some portfolios.

MHK Absolute Performance over the Last Three Years

Researchers in behavioral finance have documented the unfortunate tendency of investors to sell their winners too quickly and hang on to their losers too long. We are averse to admitting our mistakes and enjoy “locking in” a win. With over 70+ years of combined investment experience, we have learned that we should not fear buying high quality companies just because the stock price has gone up.

Mohawk Corporation: The Case for Investigation

The chart below shows the same chart as the one above. The only difference? The chart below shows Mohawk’s price performance relative to the S&P 500 over the last three years – despite the massive run since May, it is still severely underperforming over the last three years.

MHK Relative Performance vs SP500 over the Last Three Years

How badly has the stock underperformed? The chart below shows that if the S&P 500 just stayed flat, Mohawk would have to rise 60% to merely catch up with the broad index!

MHK Absolute Performance vs SP500

The data below is our Single Company Tear Sheet for Mohawk. For all numbers, higher is better. The basics:

  • Valuation Quintile: 4 out of a possible 5, the stock is dirt cheap on price to book, sales to EV, and three and five-year average Earnings to Price, and its FCF/EV is in the 93rd percentile as the stock generates a stunning 9.2% FCF/EV
  • Balance Sheet Quintile: 4 out of a possible 5, the stock is in the 89th percentile of the change in capex to total assets and the 83rd percentile of buyback yield, meaning management is buying shares when they are cheap
  • Earnings Quality: 3 out of a possible 5, while the stock has very high-quality earnings, achieving terrific scores on accruals and inventory to sales, overall the business’ margins are mediocre and a flag

Combine the powerful Valuation and Balance Sheet Quality scores with a firm that is in a sector that many believe is in a secular tailwind, and we believe investors should be interested. Read on to see some notes from the firm’s shareholder presentation and find other resources on Mohawk.

MHK Single Company Heat Map

Our stock charts seek to bring interesting companies to the attention of long term investors like us. We understand that laminate flooring and luxury vinyl tiles lack the “exponential” narratives driving many speculative stocks.

For short term investors scouring the stock market looking to make quick riches investing in “disruptors” we suggest watching Peter Lynch’s comments from 1994 about complexity and investing we highlighted here. We also suggest a quick review of the soaring trading volume in a subset of speculative companies we discussed in brief here, in context to Warren Buffett and Robinhood here and in our white paper here.

If you want to learn about Mohawk Industries, click here for a quick teach-in from the company’s website or for more info on 2021 earnings click here. If you would like to view our proprietary Single Stock Dashboard click here.

We have placed some key notes from the company’s Q2 Earnings Conference call and, below that, some basics from their recent presentation to investors.

EXCERPTS from Q2 Earnings Conference Call:

Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer

In the second quarter, we generated revenue of approximately $3 billion, the highest quarterly sales of any period in our company’s history. Our sales increased significantly over last year when the pandemic interrupted the global economy. Our adjusted EPS of $4.45 was the highest on record for any quarter.

Our second-quarter results were significantly stronger than we had anticipated across all our businesses, with sales building on the momentum from our first period. In the quarter, our operating margin expanded to their highest level in the last four years as we leveraged our operational and SG&A expenses. The actions we have taken to simplify our product offering, enhance our productivity, and restructure our costs are benefiting our results.

During the quarter, most of our manufacturing ran at capacity, or we were limited by material supply and labor availability. Rising freight costs and limited shipping capacity impacted our material costs, availability of imported products, local shipments to customers, and international exports. Presently, we do not anticipate near-term abatement of these constraints.

All of our markets continue to show strength with robust housing sales and remodeling investments across the world. Commercial projects are increasing as the global economy improves and businesses gain confidence to expand and remodel. Inventory levels in most channels remain low, and our sales backlog is above our historical levels. To improve our sales, mix, and efficiencies, we will introduce more new products with enhanced features and lower production complexity in the second half of the year.

With our strong balance sheet and historically low leverage, we are reviewing additional investments to expand our sales and profitability.

Christopher Wellborn, President & Chief Operating Officer

We have implemented multiple price increases in most product categories to cover inflation in materials and freight.

Raw material supplies are problematic and have impacted our LVT production and sales the most. We anticipate material and freight challenges will continue to impact our business in the third quarter.

Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer

The global economy should continue to improve due to low-interest rates, government stimulus, and the success of COVID vaccines. Around the world, flooring sales trends remain favorable, with residential remodeling and new construction at high levels and commercial projects strengthening.

In the third period, we expect our strong sales to continue, with our typical seasonal slowing from the second quarter. Material, energy, and transportation inflation is expected to continue and will require further pricing actions to offset. Most of our facilities will operate at high utilization rates though ongoing material and local labor constraints will limit our production.

In many countries, future government actions to contain COVID remain a risk and could impact our business. Given these factors, we anticipate our third-quarter adjusted EPS to be between $3.71 and $3.81, excluding any restructuring charges.

We entered this year with uncertainty about COVID, the economic recovery, home renovation, and new construction. Our business is stronger than we had anticipated, and we are increasing investments to support additional growth and improve efficiencies.

Longer-term, housing sales and remodeling are expected to remain at a historical high level, apartment renovation should accelerate as rent deferment expires, and investments in commercial projects should continue to strengthen. We are expanding our operations and introducing new innovations to maximize our results. Our balance sheet is strong, and we are exploring additional internal projects and acquisition opportunities.

Quick Facts from Mohawk Investor Relations: Top View

Quick Facts from Mohawk Investor Relations Top View Highlights

Quick Facts from Mohawk Investor Relations Top View NumbersQuick Facts from Mohawk Investor Relations Top View Sales

Segment Basics from Mohawk: Global Ceramics

Segment Basics from Mohawk Global Ceramics Fig 1Segment Basics from Mohawk Global Ceramics Fig 2

Segment Basics from Mohawk: Flooring North America & Rest of World Segments

Segment Basics from Mohawk Flooring North America Rest of World Segments Fig 1Segment Basics from Mohawk Flooring North America Rest of World Segments Fig 2

Basic Financials by Mohawk Industries

Basic Financials by Mohawk Industries Fig 1Basic Financials by Mohawk Industries Fig 2

Disclaimer
The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2020 Kailash Capital, LLC – All rights reserved.