Mohawk Industries, Inc.
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personal income. MHK is well positioned in these markets with their own manufacturing
and distribution
facilities in both Mexico and Russia, and a strong equity partner in China.
Not only was new housing construction in the U.S. near all-time lows in 2010, but there also has been
a cumulative 2.5 million fewer homes built relative to long term demand since 2006. Therefore, we believe new
housing construction in the U.S. is poised to rebound as industry conditions begin to normalize. Finally, the
BuildFax Remodeling Index stands at its highest level since August 2004, reflecting pent up demand from
homeowners seeking to update their homes. Mohawk should be a prime beneficiary of these remodeling
dynamics with ~50% of sales derived from the residential home remodel and replacement end market.
The Company enjoys various competitive advantages, which include its distribution network, product
differentiation and low cost manufacturing. It owns an unrivaled distribution system that would be costly for new
and smaller competitors to duplicate, thus serving as a significant barrier to entry. Meanwhile, the Company
differentiates its products with innovative features such as easy installation, unique images and new materials,
and provides unmatched retailer support. 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
lower unit cost as expenses are amortized over a large sales base.
In the challenging housing environment of the past few years, Mohawk 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, 2009 operating profit margin and ROE fell to 4.5% and 5.8%, respectively, from
9.9% and 17.0%, respectively, just two years earlier. Management’s goal is to return to 8%-10% margin over
the longer term. 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 close to $6.00 per share in normalized earnings power. In the meantime, over the
next five years, we project the Company would be able to generate approximately $1.8 billion cumulatively in
free cash flow, or over $26 per share. While management’s top priority for free cash flow deployment is
acquisitions, the Company is likely to continue to repay debt or repurchase stock if it is unable to find
attractively priced strategic acquisitions.
At current levels, the Company is trading at 7.0x depressed LTM EBITDA. We believe Mohawk
deserves to trade at a higher multiple due to its competitive advantages, favorable business mix, international
growth prospects, well regarded management team and proven ability to generate strong free cash flow.
Nevertheless, assuming no multiple expansion and valuing MHK at 7.0x our estimated 2013 EBITDA of
$755.0 million, our estimate of the Company’s intrinsic value is $71 a share, representing 62% upside from
current price levels.
Company Description
Mohawk Industries, based in Calhoun, Georgia is the largest manufacturer and distributor of floor
covering products. Among the Company’s well known brands are Mohawk, Karastan, Bigelow, Durkan,
Dal-Tile, American Olean, Columbian Flooring, Smartstrand and UniClic. In carpets and rugs, the Company
owns a 25% market share in the U.S., second only to Shaw Industries (31%), which is owned by Berkshire
Hathaway. However, MHK has a 34% share in the ceramic tiles (which accounts for 25% of the Company’s
2010 total sales), five times larger than the next competitor. Looking at all flooring products, MHK is the market
share leader with a 22% share, slightly ahead of Shaw Industries’ 21% share. The top ten competitors in the
industry combined have an almost 70% share of the flooring market, with the top four players representing over
50% of the market.
Mohawk Industries, Inc.
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2010 U.S. Flooring Manufacturers
Source: Floor Focus via Company presentation, August 2011
The Company operates in three operating segments: Mohawk (53% of total sales and 35% of total
segment EBITDA); Dal-Tile (25% of total sales and 23% of total EBITDA) and Unilin (22% of total sales and
42% of total EBITDA).
The Mohawk segment designs, manufactures, distributes and markets its floor covering product lines
for residential and commercial applications in both new construction and remodeling. Its lines include carpet,
Mohawk-branded ceramic tile, laminate, rugs, carpet pad, hardwood flooring and resilient flooring, in a broad
range of colors, textures and patterns. About 90% of this segment’s sales are carpet related and the remaining
10% are Mohawk branded hard surfaces flooring. Approximately 75% of the segment’s sales are to residential
customers, of which about 75% are for residential replacement and ~25% are to residential new construction.
The remaining 25% of the segment’s sales are attributed to the commercial construction end market (of which
70% is for replacement needs and 30% is for new construction).
MHK’s Dal-Tile segment designs, manufactures, sources, distributes and markets a broad line of
ceramic tile, porcelain tile, natural stone and other products used in the residential and commercial markets for
both new construction and remodeling. Commercial construction accounts for approximately 40% of the
segment’s sales. Mohawk purchased Dal-Tile in March 2002 for $1.8 billion. At the time of purchase, Dal-Tile
had a little over $1.0 billion in sales and a 25% market share in the tiles category, which is four times its
nearest competitor. Under Mohawk’s ownership, Dal-Tile’s sales have increased over 30% and market share
now stands at 34%, which is five times its nearest competitor. Dal-Tile also has leading market positions in
stone flooring and countertops. The stone business is a distribution business where Dal-Tile leverages its
customer base through its existing sales and service centers. Management estimates, that in just a few years,
they have grown the business from zero to approximately 15%-20% market share while becoming one of the
major distributors of stone slabs.
Finally, Unilin is one of the leaders in laminate flooring technology and is one of the largest vertically
integrated laminate flooring manufacturers in the U.S., producing both laminate flooring and related high
density fiberboard. About 75% of the segment’s sales are non-U.S., primarily Europe, and 25% are U.S. Unilin
products are positioned on the mid to high end of the marketplace and are primarily sold to the residential
replacement market through retailers, independent distributors and home centers in Europe and North America
under the Quick-Step, Columbia Floor, Century Flooring and Universal Flooring brands. Unilin commercialized
direct pressure laminate technology (DPL), a process now used across the industry. The Company is also