September 13, 2011

Mohawk Industries, Inc. 

 

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Aging U.S. Housing Stock 

The age of owner-occupied housing stock has been trending upwards over the last ten years. In 1997, 

the median age of the average American home was 29 years, but it crept up to 32 years by 2007. In fact, 

according to the latest American Housing Survey, over 50% of the U.S. housing stock is 40 years or older, 

which bodes well for future flooring/remodeling expenditures .  

U.S. Housing Stock 

Year Structure Was Built

Total Housing Units % 

of 

Total 

2005 to 2009 

7,324 

5.6% 

2000 to 2004 

9,158 

7.0% 

1995 to 1999 

8,821 

6.8% 

1990 to 1994 

7,060 

5.4% 

1985 to 1989 

8,804 

6.8% 

1980 to 1984 

7,478 

5.7% 

1975 to 1979 

13,731 

10.6% 

1970 to 1974 

11,068 

8.5% 

1960 to 1969 

15,261 

11.7% 

1950 to 1959 

13,222 

10.2% 

1940 to 1949 

7,945 

6.1% 

1930 to 1939 

5,840 

4.5% 

1920 to 1929 

5,164 

4.0% 

   1919 or earlier 

9,235 7.1% 

 130,111 

100.0% 

Source: American Housing Survey for the United States, 2009 

 

International Growth 

Approximately 15%-20% of the Mohawk’s total sales are generated outside of the U.S. Currently, the 

Company is focused on the developing countries, in particular, Mexico, Russia and China.  

International Growth Opportunities 

Sq. Ft. in Millions 

2005

2006

2007

2008

2009 

China  

   TILE 

33,100

40,400

47,600

54,700

59,200 

Russia 

   LAMINATE 

395

409

527

656

592 

Mexico  

   TILE 

1,732

1,765

1,861

1,894

1,754 

Source: Ceramic World, Frost & Sullivan, China Construction Ceramics Association 

and management estimates via Company presentation 

 

The Mexico tile market is equivalent to the U.S. market in terms of market size and unit volume, and 

growing 5%-6% per year. The Company’s Dal-Tile business unit has manufactured ceramic tiles in Mexico (at 

its Monterrey facility) since 1955, primarily for export to the United States. Sales in the Mexican market was 

primarily on the higher end segment of the market and MHK achieved less than a 10% market share of the 

entire market. However, the lower end of the segment comprises the largest market segment. Now, Mexico is 

one of the focal points of MHK’s growth strategy. To gain a larger share of this market, the Company recently 

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Mohawk Industries, Inc. 

 

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constructed a new plant in Salamanca, near Mexico City, to expand production, broaden the product offerings 

to encompass value price points and increase market penetration through distributors. This new plant is 

targeted to begin production in mid-2012. According to Lorberbaum, 

“The Mexican marketplace this year [2010] grew 3%, it’s anticipated to grow about 6% next 

year. So we believe it’s a good market to be in. We have management talent there that 

understands how to operate the plants, and understands the customer base. And we will invest 

this year [2011], broadening our distribution, and in some cases, selling the products that we 

have into the marketplace and they’ll be replaced by new ones when the [new] plant [comes on-

line]….” 

4

  

MHK started distributing tiles to the Russian marketplace during 2008. In 2009, total flooring market in 

this country was approximately 4.1 billion square feet, with laminate and hardwood flooring accounting for 9% 

and 5%, respectively, of the total market. Russia’s market growth is driven by a rapidly expanding middle class 

and rising personal income. Until recently, the Company primarily imported ceramic and laminates into the 

Russian market from its European plants. However, importing is difficult as it is not only costly, but it is difficult 

to get products across the borders, which negatively impacts customer service levels. In 2009, MHK built a 

distribution center in Russia in order to improve customer service and enable it to broaden out its sales base. 

In 2010, the Company began construction of a manufacturing plant in the country, which will be partly 

operational in 2011. This new facility will be able to support $100 million worth of sales and should be 

operational in 3Q 2011. As in Europe, the Company aims to compete in the mid- to high-end with differentiated 

products in the Russian laminate market.   

The Chinese flooring market is estimated to be approximately 60 billion square feet, or 30 times the 

size of the U.S. market, and it is expected to grow 10%-12% per year. The market is highly fragmented with the 

largest player having no more than a 3% or 4% market share. Mohawk recently entered the Chinese market 

with an $80 million investment for a 34% interest in Sanfi, one of the country’s top ten ceramic tile 

manufacturers. This investment not only allows the Company to participate in the world’s largest and fastest 

growing tile market, but it also provides MHK with a source of low cost value-added products for the North 

American market and a gateway to neighboring Asian markets. According to Lorberbaum,  

“We’ve put significant capacity in that marketplace. We are developing the customers, 

broadening our distribution. We are, in China, we brought together glazed floor tile technology, 

which the first line has already been started up in China. We’re helping them develop products. 

We’re helping them improve their merchandising and marketing, and the combination of those 

pieces; we believe that we can grow our share, both from an internal standpoint. And then longer-

term, it would give us the base to possibly start consolidating the market over time and put us in a 

position to significantly participate in the market over time.”

5

 

Valuation 

At current levels, Mohawk is trading at 7.0x LTM EBITDA, which we believe represents depressed 

profitability. Over the last 10 years, TEV/LTM EBITDA ranged between 4.9x and 12.5x, and averaged 8.7x. 

Comparable companies in our universe that supply building products to the home construction and remodel 

industry are currently trading at ~10.0x LTM EBITDA.  

From a strategic acquirer perspective, Berkshire Hathaway acquired Shaw Industries at ~7.0x LTM 

EBITDA in 2001. However, we believe margins were more normalized in 2001 than is currently the case. At the 

time of Berkshire’s acquisition, Shaw’s had operating profit margin of 9.4%, which was similar to MHK’s 

profitability at the same time and much higher than the Company’s operating profit margin of 5.8% in 2010. 

Furthermore, the majority of Shaw’s business is carpeting, which has slower growth and a lower operating 

profit margin. More recently, in August 2009, private equity group, TPG Capital, acquired a 12% interest in 

another of MHK’s competitors, Armstrong World Industries, for about $156 million, implying a valuation of 

                                                      

4

 4Q 2010 earnings call transcript 

5

 Ibid 

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