Latest Articles


« | Main | »

Masco: Reckless endangerment

Print This Post

Disclaimer: We are not single stock pickers, we generally do not use single stocks in our client portfolios and we base virtually all comments on a company’s SEC filings, information on Yahoo! Finance and information available on the company’s website. We are not offering buy or sell recommendations and you should not interpret any article as such. We are generally commenting on some metric of a company’s business. Stock prices and company fundamentals sometimes go in tandem, sometimes not. For example, a stock price often already reflects expectations of changes in fundamentals.

So why do we bother with single company commentary?

We will sometimes offer commentary on an individual company because understanding the individual players within the economy offers insights into broader trends. Many of our clients have equity based compensation and sometimes we think that what we learn from studying their employer is worth sharing. It also is fun, if you like making financial diagnoses from incomplete financial information like a company’s 10-Q filings. Kinda like House, but a company’s health instead of a real person’s.

Masco employs 56,000 people who make, sell and sometimes install $12 billion worth of building materials each year for new homes and remodels. They make kitchen cabinets (“Kraftmaid”, “Mill’s Pride”), plumbing fixtures (“Delta”), windows and some paints, among other things. Most of their business (80%) is in the US. They mostly sell to the big home improvement centers (20% of all sales are to Home Depot) and to the large home builders.

Masco is a company with a colorful corporate history. It was founded by the current CEO’s father in 1929, just days before the stock market crash. It has manufactured almost everything at one point in time – defense equipment, car parts, furniture, appliances etc etc. It has been a voracious acquirer of companies and is considered to be good at wringing efficiences from manufacturing processes for certain types of products. It has also had to divest a lot of businesses which did not end up working out. It does seem to have more or less figured out what it is good at and what are its competitive advantages. At this point, the business appears to actually be kind of rationalized and streamlined.

Masco appears to be run as a family fiefdom business. The CEO, Richard Manoogian, is 70 years old and has been an executive officer at the company since 1962(!). There have been all sorts of dodgy deals over the year, which have enriched the CEO and other top officers. The executives have an uncanny knack in selling stock at just the right time. There is a special juicy retirement plan just for top officers. Dodgy tax advoidance schemes which have led to writeoffs. Etc. Etc.

This is a classic “value” play, whose major investors include some of the giants of value investing. It’s a money machine but with some clouds hanging over it.

The company’s latest maneuvering may be its most audacious yet (I will not vouch for that not knowing the full details of previous transactions).

Masco’s current business is extremely cyclical, particularly in the case of a housing led recession. And we are about to enter the mother of all housing led recessions. New home construction will likely fall by more than 50% from the stratospheric levels of 2004-2006. Home sales – a major impetus behind remodeling – are falling precipitously. Home equity loans are being cutting off at the knees.

Masco is about to be hit by a tidal wave.

In the last year what has it been doing?

It has increased its dividend (now 4% ), stepped up investments in its plants, and bought back $1 billion worth of stock (for third year in a row).

Not exactly setting cash aside to prepare for a rainy day.

You might think that this wouldn’t matter.

An 80-year old S&P 500 company must have lots of money in the bank by this point, particularly one that has gone through ups and downs before.

No, the company actually has a negative tangible net worth (the one that counts real stuff) and its primary backup bank line is contingent on the company maintaining a certain net worth, not that far from where it is now.

It borrowed a LOT of money this year to be able buy back stock, despite having a really crummy balance sheet and facing an almost certain downturn in its business.

Was it greed? Stock buybacks magically make earnings per share growth without any change in revenue and there were some “interesting” stock option exercises by the CEO. Was it hubris? Is it the tragic end to what was supposed to be the chairman’s last hurrah?

Whatever it was, Masco was not alone. Countrywide issued all sorts of debt to buy back $2 billion worth of stock – stock it reissued to Bank of America in August at half the price it paid for it. It, too, had a lousy balance sheet and could have used the money to get through any challenges as well as have a stash to buy distressed competitors.

Anyway, I’ll keep on an eye on the company. Its stock performance is a good indicator of market expectations for how bad the housing downturn will be.

When sales drop (as they must), it will also be interesting to see how adjustable their cost structure is. There is not a lot of information in their filings about what makes up the cost of goods sold. I don’t know how much is the cost of running 75 plants and 65 warehouses/distribution centers (not that flexible) and how much is cost of buying items made for them in China (very flexible).

One of the things that may be different in this recession is the knock-on impact to manufacturing. Because none of the manufacturing jobs that left the US after the previous recession never came back, there may be fewer to lose here.

For instance, Masco stated that they wanted to move more of their manufacturing of items like faucets to Asia and more of their manufacturing of bulky cabinets to US. When cabinet orders fall, they may turn off the spigot from Asian factories first. They may still have have cashflow “challenges” but it will be the shareholders rather than US workers who take the pain.

On the other hand, Masco may use the slowdown to go ahead and shutter faucet factories here.

We will see.

Topics: Economy, Housing Bust, Investments, Stock | No Comments »

Comments

You must be logged in to post a comment.