September 13, 2011
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- Bu səhifədəki naviqasiya:
- Mohawk Industries, Inc.
- Growth Drivers and Catalysts
- Rebound in New Residential Housing Construction
- Home Replacement and Remodeling
- BuildFax Remodeling Index Mohawk Sales by End Markets International 15.0% US New Residential
- Repair/Remodel 45.0%
Mohawk Industries, Inc.
- 55 - system to service all of Mohawk's operations, and launched a more relevant marketing campaign that emphasized the strength of the Company's core brands. Lorberbaum’s restructuring efforts paid off as Mohawk profitability steadily improved each year under the early part of his tenure and consistently maintained 9%-11% operating profit margin since 2001. However, since the onset of the housing recession that began in 2006, the Company has been unable to offset declining operating profit due to lower sales, the deleveraging of the Company’s fixed cost structure and higher raw material costs. As a result, the Company’s operating margin fell to 4.5% in 2009 from 9.9% in 2007. Management moved quickly to align MHK’s infrastructure with current market demand, such as closing inefficient facilities, redesigning and automating processes, and upgrading information systems and reporting tools. Also, the Company focused on managing working capital and limiting capital expenditure to projects with immediate paybacks. All these actions have helped improved profitability as operating profit margin improved 130 bps to 5.8% in 2010 and the Company generated robust free cash flow as previously mentioned. Operating profit continued to improve in 2011 as first half 2011 operating profit increased to 6.9%, up 50 bps from 6.4% in the same period last year. Management believes the Company can eventually return to 8%-10% operating profit margin. From 2001 when Lorberbaum was appointed CEO through the start of the housing recession in 2006, the Company’s return on equity (ROE) ranged between 11.9% and 19.9%, and averaged 14.4%, while return on invested capital (ROIC) ranged between 8.0% and 15.8%, and averaged 11.7%. As a result of lower sales volume and higher raw material costs over the last few years, the Company’s ROE dropped to an embarrassingly low 5.8% in 2010 and ROIC was a dismal 3.8%. We believe ROE and ROIC were negatively impacted during 2010 reflecting lower sales volume (which we believe are cyclical rather than secular issues) and higher raw material costs (which are a temporary mismatch between price and cost). Based on the Company’s current capital structure, asset turnover level and a normalized tax rate, if management reaches its targeted 9% operating profit margin, we estimate the Company can generate ~12% ROE, which translates to approximately $6.00 per share in normalized earnings power. Given this level of mediocre ROE and ROIC, one may question whether the Company is competitively advantaged. However, the Company’s return on tangible invested capital has ranged between high teens to high 20% range. We believe ROTIC is more reflective of the Company’s business model since ROE and ROIC are diluted by management’s capital allocation and other temporary business conditions. Growth Drivers and Catalysts We believe Mohawk will be a prime beneficiary of a few favorable trends: the eventual recovery of the new residential housing construction market, an aging housing stock, pent up demand for remodeling, and international expansion. Rebound in New Residential Housing Construction As we mentioned in the introduction of our 2011 summer double Issue, Stocks Set For a Lift From a Housing Recovery, new housing construction is currently near an all time low. Using housing permits as a proxy for housing starts/construction (since this data is widely available and has closely tracked construction), median housing starts totaled approximately 1.5 million homes per year since 1960. This figure is more or less in-line with long term housing demand which is around 1.35 million per year. Between 2000 and 2006, sales of new and existing homes increased by 14% and 26%, respectively. Home builders responded in kind and increased production to meet demand, resulting in a cumulative 2.4 million new homes being over built relative to long term demand between 2004 and 2006. At the onset of the recent housing recession, housing permits dropped to under 1.4 million by 2006 and continued to decline thereafter, reaching the historic low point of roughly 440,000 units in 2009. Since the overbuilding ended in 2006 and the ensuing decline in production, there has been a cumulative 2.5 million fewer homes built relative to long term demand. This amount of under building helped offset the accumulated 2.4 million surplus homes and has left the single family housing market in an under-built state. In 2010, annual new home construction was just 600,000 consisting of 450,000 single family homes, 100,000 multifamily and 50,000 manufactured homes.
Mohawk Industries, Inc.
- 56 - Source: U.S. Census Bureau; NAHB via PulteGroup, Inc., Investor Presentation, June 2011 Source: Moody’s Analytics, “Housing Hits Bottom in 2011”
The average carpet or laminate wood floor lasts approximately seven to ten years. One of the more popular items homeowners like to remodel is their floor, either replace due to wear and tear or to get an updated look of the room. According to The National Association of Home Builders (NAHB), Americans spent $116 billion on improvements to owner-occupied units in 2010, down from a peak of $146 billion in 2006. However, housing expenditures are expected to increase steadily as the broader housing market recovers through 2011 and 2012, reaching $119 billion and $131 billion, respectively. Indeed, according to a recent industry report, the Residential BuildFax Remodeling Index was up for the twentieth straight month in June 2011 and now stands at the highest point since August 2004. This trend bodes well for MHK since close to half of the Company’s business is derived from the residential home remodeling and replacement end market.
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