Masco Bides Its Time

Recent results at Masco (NYSE: MAS) weren't as bad as feared, but when sales will begin to grow again is anyone's guess. The stock, though, may be worth waiting around for.

Masco's second quarter wasn't pretty; total sales fell 6%. North America was the culprit, as sales fell 10% and account for about 80% of the total. International sales, which were boosted significantly from a weak dollar, increased a nice 14%. Management cited particular weakness for "big-ticket home improvement items" like cabinets, which make up about a quarter of total product sales.

Bottom-line results were equally uninspiring, as net income also fell about 6%. However, this wasn't as bad as management originally expected, and as a result it tightened full-year expectations for continuing earnings up to $1.60-$1.70, from $1.50-$1.70 previously. Unfortunately, it still expects a mid-single-digit fall in sales for all of 2007. Exposure to Home Depot (NYSE: HD) probably isn't helping either, as about 20% of sales head to the struggling home improvement giant.

To stem the current sales slide, management "has been focused on the rationalization of its businesses," using related plant closings, headcount reductions, and sourcing changes to try and offset the effect of higher commodity costs. It also made a couple of recent acquisitions for companies in the construction products and services industries.

Despite the near-term weakness, Masco remains a solid cash generator and continues to buy back shares. It also just increased its dividend, marking the 49th straight year of higher dividend payouts: currently 3.6%. Better yet, it plans on returning a cool $1 billion to shareholders annually over the next several years and is targeting an 18% return on invested capital by 2010.

Also promising was the note that national builders such as Pulte (NYSE: PHM), D.R. Horton (NYSE: DHI), and Centex (NYSE: CTX), account for only 25% of total new residential construction, with smaller, local builders accounting for the vast majority. And management detailed that excess inventory from overbuilding is causing the national builders to suffer more than the local guys.

Judging by the second-quarter results, every facet of the industry is struggling, and few can predict when conditions will stabilize. As a result, it may be a good idea to stick with conservatively managed companies operating in the industry. Masco fits this description, as does carpet manufacturer Mohawk (NYSE: MHK). Both sell products with market-leading positions and should be able to withstand a protracted industry downturn.

Masco is a Motley Fool Income Investor selection. Try out the market-beating service free for 30 days.

Fool contributor Ryan Fuhrmann is long shares of Masco and Home Depot, but has no financial interest in any other company mentioned. Home Depot is an Inside Value selection. The Fool has an ironclad disclosure policy.