Masco Solid On Repair/Remodel Activity, Material Costs High

Increased repair and remodeling activity has been driving Masco Corporation’s (NYSE:MAS) revenues over the last few quarters along with product innovation and cost-saving initiatives.

More than 80% of Masco’s revenues are generated through repair/remodel activity. The company’s growth in the last few quarters has primarily been driven by a steady rise in repair and remodel activity. Strong demand for repair and remodeling products across all channels of distribution led to a 4% increase in North American sales in the second quarter of 2017.

KraftMaid, the company’s leading repair and remodel brand, delivered solid performance in the retail and dealer channels, signifying mid-single digit growth on increased volumes in the second quarter.

Product innovation also plays an important role in driving results. In 2016, Masco invested in several new products and programs across its different brands, positioning itself for growth in 2017 and beyond.

Also, Masco regularly divests its less profitable and underperforming businesses to focus on core areas in a bid to accelerate growth and drive shareholders’ value. In the second quarter of 2017, Masco completed the divestiture of its Arrow Fastener business for $126 million.

We are encouraged by the company’s cost-saving initiatives that have been driving the margins over the past few quarters. Such initiatives include business consolidations, system implementations, plant closures, branch shut downs, improvement in the global supply chain and headcount reduction. These are targeted at company-wide annual savings through reduction of corporate expenses and simplification of the company’s organizational structure. Notably, operating margins improved 40 basis points (bps) in the first half of 2017 and 160 bps in 2016.

Meanwhile, as the housing market gains momentum, demand for products associated with home construction or repair is expected to increase, thereby boosting top-line growth for companies like Masco, Owens Corning Inc (NYSE:OC) , TopBuild Corp. (NYSE:BLD) and Grafton Group plc GROUF.

Raw Material & Product Launch Costs Escalate

Masco purchases several commodities like brass, resins, titanium dioxide, zinc, wood among others for the manufacturing of products. Fluctuations in the availability and prices of these commodities might raise the cost of production. Currently, the company is facing pressure exerted by increasing resin-related costs. Also, prices of copper and zinc have gone up.

Apart from raw material costs, the company bears expenses pertaining to product launches. In the third quarter of 2017, Masco expects to incur incremental costs of approximately $7 million related to product launches as well as recently-announced antidumping duties and countervailing tariffs on imported plywood from China.

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