Will Masco (MAS) Lag Q3 Earnings on Weak Cabinet Sales?
Masco Corporation (MAS) is set to report third-quarter 2014 results on Oct 28, before the market opens. Last quarter, it posted a positive earnings surprise of 14.29%. Let’s see how things are shaping up for this announcement.
Factors to Consider This Quarter
The company has been witnessing strong international sales, driven by product launches and strong performance by international plumbing and window businesses. These trends are expected to continue in the upcoming quarter. At the second-quarter conference call, management announced that July sales were up in low-to-mid single digits despite tough comparisons.
While most divisions are doing well, the cabinet business continues to underperform. Masco expects the cabinet segment to remain soft in the second half of 2014 as consumers continue to defer big ticket expenses. In fact, the segment is expected to post a modest loss in 2014 due to lower demand and ERP-related disruptions.
As regards repair and re-modeling activity, management is seeing growth in small ticket repair, mainly in the plumbing and paint businesses. However, bigger ticket repairs continue to lag, mainly in cabinets. While smaller ticket repair/remodel is expected to grow at a steady rate in the second half, bigger ticket repair activity is expected to continue to lag. Thus, in the second half of 2014, sales growth is expected to be similar to the first half.
In Sep 2014, the company announced plans to spin-off its Installation and Other Services segment into a separate company to simplify its product portfolio, allowing it to focus more on the growing home-repair and remodeling market. Moreover, the decision to spin off the homebuilding-dependent installation business will reduce the cyclicality of Masco’s portfolio.
Earnings Whisper?
Our proven model does not conclusively show that Masco Corporation is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Negative Zacks ESP: Masco Corporation’s Earnings ESP is -6.45% as the Most Accurate Estimate stands at 29 cents while the Zacks Consensus Estimate is higher at 31 cents.
Zacks Rank #3 (Hold): Though Zacks Ranks #1, 2 or 3 increase the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise.
We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Other stocks in the building construction/building materials sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
Hovnanian Enterprises Inc. (HOV), with an Earnings ESP of +15.00% and a Zacks Rank #2 (Buy).
PulteGroup, Inc. (PHM), with an Earnings ESP of +2.50% and a Zacks Rank #3.
KB Home (KBH), with an Earnings ESP of +3.92% and a Zacks Rank #3.
Read the Full Research Report on MAS
Read the Full Research Report on PHM
Read the Full Research Report on KBH
Read the Full Research Report on HOV
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