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Masco Corp (MAS) manufactures, distributes and installs home improvement and building supplies. It is very attractively priced at yesterday's 23.70 close, based on a 3.8% dividend yield, 7.35 Price/Cash Flow, and 12.6 Price/5 Year average EPS. I think the stock is worth 36, and is a good buy today in order to be positioned for a recovery in residential construction.
MAS operates in 5 segments - Cabinets and Related Products, Plumbing Products, Installation and Other Services, Decorative Architectural Products, and Other Specialty Products. Sales are 80% US and 20% International (Europe) and 60% remodeling and 40% new construction. A key customer is Home Depot at 20%. They took charges in the 4th quarter of 2006, 331 million or .88 per share, reducing expenses consistent with the slowdown in the housing market. Operating profitably at today's level of homebuilding, they should be able to increase earnings steadily as housing recovers.
I went to the SEC website and browsed the most recent 10-K and 10-Q. I also checked out an 8-K which provided a transcript of their most recent conference call. Of particular interest to me, MAS notes that the publicly traded homebuilders which I own are only 25% of the entire market for new construction. MAS has experienced a 40% reduction from large builders, but only a 20% reduction from the smaller, local builders. This goes contrary to the opinion that the publicly traded Homebuilders will profit from the recent downturn at the expense of their smaller competition.
Another point, remodeling, which is 60% of their business, normally goes up when new construction goes down. That has not happened this year, the reason being that homeowners aren't tapping the equity in the homes for improvements as much as in the past. MAS is making money in spite of this fact, which bodes well for increased earnings when remodeling picks up.
Share counts have been declining steadily, as MAS continues to use their strong cash flow to buy back shares. Growth was good until the downturn, and I look for it to resume as recovery develops.
I recently added a number of Homebuilders to my SLO portfolio, stepping in front of a lukewarm analyst upgrade and the strange rally of 10/1, which boosted their prices. From a logical point of view, MAS should start to turn around a little bit ahead of the residential construction market, and with the publicly traded homebuilders perhaps not as strong compared to their smaller competition as I thought, MAS seems like a better way to position myself for an upturn.
I bought 2,500 shares, 40% of my planned maximum position, using a market order, filling at 23.70 net.
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