Masco Earnings: Profit Margins Expand Despite Challenging End Markets

In February 2023, Masco MAS management unveiled its 2023 outlook for a 10% sales decline and adjusted operating margin compressing 60 basis points to 15%. We thought this guidance could prove conservative. Through the third quarter, Masco is tracking toward a 10% revenue decline, but profit margins have been much better than we expected. Management raised its full-year adjusted operating margin guidance again to 16.5% from 16%. Last year, Masco delivered a 15.6% margin.

We didn’t materially change our 10-year financial forecast for Masco, but we raised our fair value estimate 3% to $74 per share due to the time value of money. We continue to think the stock is undervalued.

While Masco won’t release 2024 guidance for another quarter, management did say it expects flattish repair and remodel spending next year. Considering its end-market exposure and growth initiatives, we would expect the company to outperform the broader R&R market by a couple of hundred basis points. Indeed, we continue to model low-single-digit revenue growth for Masco next year, accelerating to around 7% by the end of the decade as the R&R market recovers.

We continue to be impressed by Masco’s profit margin resiliency, which has largely been due to favorable price/cost and cost-reduction initiatives. Adjusted gross margin expanded 430 basis points year over year to 35.8%, and adjusted operating margin expanded 170 basis points to 17.6%. Over the longer run, we believe Masco can sustain 17% full-year operating margins.

Both the plumbing and decorative architectural segments saw sales fall 10% year over year as volume declines more than offset modest price increases. However, both segments realized strong margin expansion; plumbing adjusted operating margin expanded 230 basis points to 18.9% and decorative architectural margin expanded 110 basis points to 18.3%.