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%
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.