Company Reports

We think Masco’s financial performance over the past decade has been as much of a self-help story as a story of improving end markets. Masco almost entirely refreshed its senior executive management team in 2014. Since then, it has taken significant measures to build a stronger and more consistent business model. The firm divested its most cyclical and least profitable businesses (it spun off its installation business, now named TopBuild, to shareholders in 2015 and sold its windows and cabinetry businesses in 2019 and 2020, respectively). Management also executed significant cost-reduction initiatives and shored up the firm's balance sheet.

Masco's first-quarter financial performance was largely in line with our expectations. Softer repair and remodel spending in the United States continue to weigh on Masco's top line, and total revenue declined 3% to approximately $1.9 billion. Even so, the wide-moat-rated building products manufacturer realized solid margin expansion. Adjusted gross margin improved 210 basis points to 35.7% and adjusted operating margin 90 basis points to 16.7%.

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

Shares of Masco traded higher on Feb. 8 after the wide-moat-rated building products manufacturer reported above-FactSet consensus fourth-quarter revenue and adjusted EPS and issued a cautiously optimistic outlook for 2024. Furthermore, management now sees a pathway to record profit margin by 2026.

We think Masco’s financial performance over the past decade has been as much of a self-help story as a story of improving end markets. Masco almost entirely refreshed its senior executive management team in 2014. Since then, it has taken significant measures to build a stronger and more consistent business model. The firm divested its most cyclical and least profitable businesses (it spun off its installation business, now named TopBuild, to shareholders in 2015 and sold its windows and cabinetry businesses in 2019 and 2020, respectively). Management also executed significant cost-reduction initiatives and shored up the firm's balance sheet.

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

In February 2023, Masco 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 think Masco’s financial performance over the past decade has been as much of a self-help story as a story of improving end markets. Masco almost entirely refreshed its senior executive management team in 2014. Since then, it has taken significant measures to build a stronger and more consistent business model. The firm divested its most cyclical and least profitable businesses (it spun off its installation business, now named TopBuild, to shareholders in 2015 and sold its windows and cabinetry businesses in 2019 and 2020, respectively). Management also executed significant cost-reduction initiatives and shored up the firm's balance sheet.

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

In February 2023, management unveiled Masco’s 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.

We think Masco’s financial performance over the past decade has been as much of a self-help story as a story of improving end markets. Masco almost entirely refreshed its senior executive management team in 2014. Since then, it has taken significant measures to build a stronger and more consistent business model. The firm divested its most cyclical and least profitable businesses (it spun off its installation business, now named TopBuild, to shareholders in 2015 and sold its windows and cabinetry businesses in 2019 and 2020, respectively). Management also executed significant cost-reduction initiatives and shored up the firm's balance sheet.

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

Considering the downbeat 2023 guidance Masco issued with its fourth-quarter earnings release, we were anticipating a challenging first quarter for the wide-moat-rated building products manufacturer. Sales of approximately $2 billion were 10% lower than the year-ago quarter, primarily due to a 14% volume decline that was partially offset by a 6-percentage-point increase in net selling prices. Masco enjoyed a favorable price/cost spread during the first quarter, which caused adjusted gross margin to expand 150 basis points to 33.6%. Masco’s gross margin exceeded our expectations and was the primary reason the firm’s adjusted EPS of $0.87 handily beat the $0.63 FactSet consensus estimate.

We think Masco’s financial performance over the past decade has been as much of a self-help story as a story of improving end markets. Masco almost entirely refreshed its senior executive management team in 2014. Since then, it has taken significant measures to build a stronger and more consistent business model. The firm divested its most cyclical and least profitable businesses (it spun off its installation business, now named TopBuild, to shareholders in 2015 and sold its windows and cabinetry businesses in 2019 and 2020, respectively). Management also executed significant cost-reduction initiatives and shored up the firm's balance sheet.

U.S. home sales slowed significantly in 2022 as rising mortgage rates and elevated home prices made homeownership less affordable for more Americans. By mid-2022, the average 30-year fixed mortgage rate had increased roughly 300 basis points year over year to over 6%. According to estimates from the National Association of Home Builders, this rate increase priced out more than 16 million households. We also think higher rates and general economic uncertainty caused some qualified prospective buyers to move to the sidelines. All told, 2022 new- and existing-home sales declined 17% and 18% year over year, respectively.

While Masco’s fourth-quarter results weakened compared with the year-ago quarter (reported sales was down 5% and adjusted operating margin of 12.2% was 90 basis points lower), the firm’s performance was largely in line with our expectations. However, management painted a far bleaker 2023 outlook than we were anticipating. Management sees North American repair and remodel, or R&R, spending falling by a low-double-digit percentage compared with our forecast of a low-single-digit decline. Management expects a limited effect from channel inventory destocking (that is, inventory is at healthy levels for the demand environment), and, in our view, Masco’s risk from consumers trading down to lower-price brands is relatively muted compared with other building products firms. We have no reason to believe Masco is losing market share to competitors (in fact, we think the firm is gaining share with its professional paint strategy). As such, we view this cautious guidance is an indictment of consumer R&R spending activity in 2023. We say this guidance is cautious because other closely related firms have expressed more optimistic views (for example, Masco’s largest distributor, Ferguson, guided toward a low-single-digit market decline).

We think Masco’s financial performance over the past eight years has been as much of a self-help story as a story of improving end markets. Masco almost entirely refreshed its senior executive management team in 2014. Since then, it has taken significant measures to build a stronger and more consistent business model. The firm divested its most cyclical and least profitable businesses (it spun off its installation business, now named TopBuild, to shareholders in 2015 and sold its windows and cabinetry businesses in 2019 and 2020, respectively). Management also executed significant cost-reduction initiatives and shored up the firm's balance sheet.

After analyzing recent United States housing market data and industry commentary, we've made downward revisions to our near-term outlook for new residential construction, home prices, and repair and remodel spending.

Masco's stock price declined over 5% on Oct. 26 after the wide-moat-rated building products manufacturer released disappointing third-quarter results and moderated its full-year 2022 financial outlook. Revenue of $2.2 billion was unchanged compared to the year-ago quarter as a 9% increase in price was offset by a 6% volume decline and a 3% sales decline tied to currency translation. Volume and currency headwinds were more severe than we had expected (we had modeled roughly 6% third-quarter revenue growth). However, we were more disappointed by Masco's profit margin, which substantially underperformed our projection (15.9% versus our 18.2% forecast). Lower volumes, higher operational costs, and currency headwinds more than offset the favorable margin effect from higher selling prices. Management now expects full-year revenue growth of 3%-4% (5%-7% previously) and adjusted EPS of $3.70-$3.80 ($4.15-$4.25 previously).

We think Masco’s financial performance over the past eight years has been as much of a self-help story as a story of improving end markets. Masco almost entirely refreshed its senior executive management team in 2014. Since then, it has taken significant measures to build a stronger and more consistent business model. The firm divested its most cyclical and least profitable businesses (it spun off its installation business, now named TopBuild, to shareholders in 2015 and sold its windows and cabinetry businesses in 2019 and 2020, respectively). Management also executed significant cost-reduction initiatives and shored up the firm's balance sheet.