Amass Returns with Masco Corporation

Sometimes the best investment plays are in companies that simply supply the companies that do the real dirty work, selling. The hard part is finding a retailer that is growing earnings at a rapid pace and that dominates its industry; enter Home Depot (NYSE: HD  ) . Home Depot is the largest home improvement specialty retailer in the world. It has been growing earnings and returning billions of dollars to its shareholders while its suppliers grow as well. Masco Corporation (NYSE: MAS  ) is arguably the top supplier and beneficiary from Home Depot's continued rise and the company has been growing at an accelerated rate itself. Let's take a deep look and see what Masco has to offer investors.

Manufacturing profits
Masco is a manufacturer and distributor of home improvement and building products, with the majority of its business being in North America and Europe. The company operates in five main segments, all of which provide products to Home Depot's 2,200+ locations:

  • Cabinetry and related products: cabinets, furniture, etc.
  • Plumbing products: faucets, bathing systems, spas
  • Decorative architectural products: paint, wood care, etc.
  • Installation and services: Insulation installation, remodeling, etc.
  • Other products: windows, doors, fastening tools, etc. 
 
The perfectly executed plan
Masco's position within Home Depot had nothing to do with luck or being in the right place at the right time, it was a perfectly executed plan by management. In 1999, Masco acquired five companies for $3.8 billion and all five were suppliers to Home Depot. These companies were:
  1. Arrow Fastener Company: manufacturer of staple guns, glue guns, hand tools, supplies, and accessories. 
  2. Behr Process Corporation: manufacturer of premium architectural coatings such as paints, stains, and varnishes. 
  3. Inrecon LLC: service company involved in repair, remodeling, and restoration of residential, commercial, and institutional facilities.
  4. Mill's Pride LLP: the leading manufacturer of bath vanities, home office workstations, entertainment centers, bookcases, ready-to-assemble and assembled cabinetry for kitchens and bathrooms.
  5. Superia Radiatoren: manufacturer of a full range of radiators and hydronic heating systems

It was a seamless transition following these buyouts and Masco has continued all relations with Home Depot since. Masco has continued making strategic acquisitions since 1999. For example, in 2001 it bought Milgard, the largest manufacturer of vinyl windows and sliding glass doors in the western United States. The company could easily grow its current brand portfolio by the billions of dollars for decades, but I do not think it is done acquiring companies just yet. I expect Masco to continue finding undervalued, small-market companies and turning them into household names. 

 

So how important is Home Depot...
In 2012's annual report, Masco stated that $2.1 billion, or approximately 28%, of its consolidated net sales were to Home Depot. This is not a small percentage by any means and management stated that had Behr Paints or other products not been sold exclusively through Home Depot, sales would have been negatively affected. Therefore, it is in the best interest of the company to maintain all business within Home Depot, at least for the time being.

Do not fear Lowe's
Because Masco is being spotlighted as a derivative play on Home Depot in this article, one would think of Lowe's (NYSE: LOW  ) as a threat, but this is not the case. Masco is a supplier for Lowe's as well. Lowe's is the second largest home improvement specialty retailer in the world, with 1,758 locations in the United States, Mexico, and Canada. 

In the same 2012 annual report, Masco stated that Lowe's made up a little under 10% of consolidated net sales, making the company a very important customer. Lowe's carries several key Masco brands, such as Delta, KraftMaid, Peerless, Aqua Glass, Hansgrohe, and Axor, boosting their exposure, popularity, and demand. I believe Masco's position within the two largest home improvement retailers along with its many other distribution channels will allow for exponential growth in the future.

The summer report
In its latest quarterly report, Masco beat on both the top and bottom lines. Here's a glance at the key statistics:

2nd Quarter 2013 2012 Year-Over-Year Growth
Earnings Per Share $0.23  $0.10  109.1%
Net Sales $2.15 billion  $2.00 billion  7.5%

It was a great quarter in which earnings and revenue grew year-over-year, plus margins expanded 200 basis points to 28.9%. Management credited the strong performance to home building growth in North America. This will remain key to its continued growth. Overall, I believe this quarter was the momentum-builder Masco needed and this strength will carry over into the third quarter. 

The coming years
Analysts believe Masco will experience immense growth through 2015. Take a look at the current consensus estimates:

  • 2013: 137.5% growth
  • 2014: 46.05% growth
  • 2015: 34.23% growth
As you can see, Masco is expected to have explosive growth over the next few years. Again, new home construction will be key to the company's ability to reach these numbers, but remodeling and do-it-yourself projects will also play a large role. On a forward earnings basis, Masco can be considered a value play at today's levels. 

The Foolish bottom line
Masco is not only a great derivative play on Home Depot and Lowe's, but it is a strong value play on new home construction and remodeling worldwide. It has been beaten down over the last few weeks and it currently sits about 14.35% below its 52-week high. Take a look and see if your portfolio could use the exposure that Masco Corporation provides.

The future of retail
Picking retail winners in this economy can be tough. On top
of that, the retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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