September 13, 2011

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. 

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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 

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