Masco Earnings: Profit Margins Continue To Impress Despite Lower Sales Volumes

In February 2023, management unveiled Masco’s MAS 2023 outlook, which envisioned a 10% decline in revenue and a 60-basis-point compression in adjusted operating margin to 15%. We thought this guidance could prove conservative. Through the first half of 2023, Masco is tracking toward a 10% revenue decline, but profit margins have been much better than we expected. Indeed, the firm is on track to realize solid margin expansion this year, and management is now targeting a 16% adjusted operating margin. We’ve raised our fair value estimate approximately 1% to $72 per share due to modest upward revisions to our near-term profit margin outlook.

Second-quarter revenue declined 10% year over year as plumbing segment sales pulled back 11% and decorative architectural sales fell 8%. Management noted soft demand across its North American plumbing channels, and international plumbing sales also weakened, especially in Europe and China. Within the decorative architectural segment, professional paint sales declined by a mid-single-digit percentage (against a 40% prior-year comparison) and do-it-yourself paint sales fell by a low-single-digit percentage, but management sees the DIY market continuing to soften, with full-year revenue down by a high-single-digit percentage. We continue to see Masco’s expansion into the professional paint category as one of the firm’s most attractive growth opportunities.

Adjusted operating margin expanded 140 basis points year over year to 19% as both segments delivered a 20% adjusted operating margin (corporate expense was 1% of sales). In our view, Masco’s strong margins are a testament to the firm’s pricing power and shrewd cost containment. Nevertheless, the firm continues to invest in growth initiatives, and it did announce a small acquisition of a sauna business that will fit with its spa business. We’d prefer Masco not expand too much into large-ticket, discretionary product lineups like this, but this deal won’t move the needle, in our view.