September 13, 2011

Mohawk Industries, Inc. 

 

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approximately 5.0x LTM EBITDA. It should be noted that TPG did not acquire the shares directly from 

Armstrong World Industries. Instead, TPG acquired the shares from The Armstrong World Industries Asbestos 

Personal Injury Settlement Trust (which is a separate legal entity formed 2006 as part of Armstrong World’s 

emergence from bankruptcy to handle Armstrong World’s asbestos liabilities and currently owns ~52% of 

Armstrong World Industries stock). We believe the Trust is being forced to sell shares at such a low valuation 

in order to fund liability settlements.  

Building Products Companies Valuation Comparison 

 

TEV 

LTM EBITDA 

TEV / LTM EBTDA 

Mohawk Industries 

4,400.1  

628.6  

7.0  

Armstrong World Industries 

2,732.6  

353.5  

7.7  

Interface Inc. 

1,086.5  

134.8  

8.1  

Beacon Roofing Supply 

1,058.8  

112.6  

9.4  

Trex Company 

354.9  

30.3  

11.7  

Masco Corporation 

5,220.4  

421.0  

12.4  

Average   

 

 

9.4  

 

 

 

 

Average excluding Mohawk 

 

 

9.9  

Source: Capital IQ 

 

 

 

 

In our view, MHK warrants a premium valuation due to its competitive advantages, better business 

mix, favorable international growth prospects, well regarded management team and ability to generate strong 

free cash flow. Nevertheless, assuming that there is no expansion in the valuation multiple and valuing MHK at 

7.5x our estimated 2013 EBITDA of $755.0 million, estimate the Company’s intrinsic value to be $71 per share 

for the Company, representing ~62% upside from current price levels. In deriving our EBITDA estimate, we 

assumed sales growth of only 3.0% per year over the next two years. Our sales assumptions incorporates no 

improvement in the new residential construction market from 2010’s depressed levels, continued slow growth 

for both commercial and residential remodeling activities and price increases initiated by the Company to catch 

up on recovering higher raw material costs. Also, we assumed gradual improvement in the Company’s 

profitability level due to price increases the Company has taken to recover higher raw materials and cost 

savings initiatives.  Management has restructured all three businesses to improve efficiencies, reduce 

manufacturing costs, enhance materials yields (through increased production speeds and innovative product 

engineering), and utilize alternative materials. Accordingly, we assumed operating profit margin to increase 

from 5.8% at the end of 2010 to 8.0% by the end of 2013. We would note that this level of operating profitability 

is at the lower end management’s targeted goal of 8%-10% operating profit margin. In addition, any 

improvement in the new construction market will provide meaningful upside to our operating profit assumption. 

Finally, we assumed all the free cash flow generated by the Company is used to repay debt.  

MHK Estimate of Intrinsic Value 

2013E EBITDA 

$754.8 

Valuation Multiple 

 7.0x 

Total Enterprise Value 

 5,283.8 

Less: 2013E Net Debt 

 360.5 

Intrinsic Equity Value 

4,923.3 

 

 

Shares Outstanding 

69.0 

 

 

Intrinsic Value per share 

$71 

 

 

% Upside From Current Levels 

61% 

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Mohawk Industries, Inc. 

 

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Share Ownership 

We believe management’s interests are tightly aligned with shareholders. As a result of the merger of 

Mohawk and Aladdin Mills in 1994, the Lorberbaum family (led by the Company’s CEO Jeffrey Lorberbaum, 

age 56) owns 10.8 million shares or approximately 16% of the Company’s shares outstanding. As mentioned 

previously, Mr. Lorberbaum joined the Company in 1995 and has been Mohawk’s CEO since 2001.  

Conclusion 

Mohawk Industries is an out of favor stock. However, as the world’s largest flooring company, MHK is 

one of the prime beneficiaries of an eventual recovery in new residential housing construction. In the 

meantime, as it waits for that end market to turn around, half of the Company’s sales come from the 

replacement and remodeling end markets and another 15%-20% come from international channels, particularly 

Mexico, Russia and China. These additional end markets should help MHK weather the recent housing 

recession. In the meantime, the Company is focused on generating free cash flow by managing its cost 

structure, capital expenditures and working capital in order to pay down debt.  Mohawk maintains various 

competitive advantages, which helped it outperform the flooring industry through the recent downturn. The 

Company maintains a distribution system that is not only difficult for smaller competitors to replicate, but it 

serves as a barrier to entry against new competitors. This leading distribution network is a critical factor in 

maintaining fill-rates, expanding its geographic reach, and generating high customer service levels. MHK’s 

innovation machine continue to develop products that lead and move the industry to a new level, such as 

creating a new class of materials in carpeting, easy to install laminate wood floors and unique images in tiles. 

Finally, as a result of its position as the largest flooring company, Mohawk possesses a scale advantage 

relative to its smaller competitors, giving it leverage against its suppliers and also, lower unit cost as expenses 

are amortized over a large sales base.  

At the current share price, Mohawk is trading about 7.0x LTM EBITDA, which we believe likely 

represents a depressed profitability level. We also believe MHK warrants a premium valuation due to its 

competitive advantages, better business mix, favorable international growth prospects, well regarded 

management team and strong ability to generate robust free cash flow. Nevertheless, assuming no multiple 

expansion and valuing Mohawk at 7.0x our 2013E EBITDA of $755 million, we derive a value of $71 for the 

Company, representing ~62% upside from current price levels. 

 

 

Risks 

Risks that Mohawk Industries may not achieve our estimate of the Company’s intrinsic value include, 

but are not limited to, higher raw material costs, inability to pass through pricing to recover margins, a slower 

than expected recovery in the new residential housing construction market, slowdown in residential home 

remodeling, inability to expand internationally, increased competitive pressures, changes in the regulatory 

environment, and failure to properly integrate future acquisitions. 

Analyst Certification 

Asset Analysis Focus certifies that the views expressed in this report accurately reflect the personal 

views of our analysts about the subject securities and issuers mentioned. We also certify that no part of our 

analysts’ compensation was, is, or will be, directly or indirectly, related to the specific views expressed in this 

report. 

 

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