Masco Manufactured Its Way to a Third Quarter Beat

Masco Corporation (NYSE: MAS  ) reported third quarter earnings on October 28 and the results exceeded analyst expectations. Masco supplies products to the two largest home improvement retailers in the world, Home Depot  (NYSE: HD  )  and Lowe's  (NYSE: LOW  ) . Even with the beat, shares have only moved up by a few pennies which left investors scratching their heads and wondering why. Let's take a look and see if this lack of movement is a buying opportunity or if there was something in the report telling us to stay away.

Manufacturing master
Masco Corporation is a manufacturer and distributor of home improvement and building products, with the majority of its business in North America and Europe. The company operates in five main segments:

  • 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.
(Image Source: Masco.com)

The results
Third quarter results were released on October 28. The reported statistics exceeded analyst expectations on both the top and bottom lines. Here's an overview:

Metric Reported Expected
Earnings Per Share $0.27 $0.25
Revenue $2.15 billion $2.10 billion

Earning per share grew 92.9% and revenue rose 12.4% year-over-year. The company's gross margin expanded 120 basis points to 28.5%. This marked the eighth consecutive quarter of both sales growth and margin expansion, and this momentum could easily carry over into the fourth quarter. Management noted strength in new home construction and a rise in home improvement and repairs as the primary drivers for the great performance in the quarter. Overall, these results surely should have driven the stock price much higher.

Outlook
Management believes the good times are going to keep rolling for Masco in the United States. New home construction is expected to rise at a consistent rate while the environment for home improvement and remodels remains encouraging. Europe is still an issue but the economic conditions there are slowly improving. All in all, management believes they can navigate the troubles in Europe while growing business in North America to drive earnings and revenue higher for the rest of the year.

Earnings on tap

(Image Source: Home Depot Investor Relations)

Home Depot is the largest home improvement retailer with 2,258 locations in the United States, Puerto Rico, U.S. Virgin Islands, Canada, Mexico, and Guam. In 2012's annual report , Masco stated that approximately 28% of its consolidated net sales were to Home Depot. Both of these numbers should rise in this year's report. This large percentage of sales can be credited to brands like Behr Paints being sold exclusively through Home Depot, a major positive for each brand carried. Home Depot is set to report earnings on November 19, so take a close look at its outlook as it will be an indicator of Masco's future performance.

(Image Source: Lowe's Investor Relations)

Lowe's takes the No. 2 spot on the list of the largest home improvement retailers in the world with 1,758 locations in the United States, Mexico, and Canada. In Masco's aforementioned 2012 annual report, it stated that Lowe's made up a little under 10% of consolidated net sales. The many brands Lowe's carries will see growth along with the rise in home improvement projects and remodeling. Having both Home Depot and Lowe's as buyers is the best asset for Masco besides its brand mix. Lowe's reports third quarter results on November 20 and its outlook will be another strong indicator of how Masco will perform in the coming quarters.

The Foolish bottom line
Masco's position as a supplier to the two largest home improvement retailers in the world and its many distribution channels that connect directly to homebuilders make it one of the most uniquely positioned companies for maximum growth. It reported a great set of third-quarter numbers and yet the stock has barely moved. I think this lack of movement in the stock is an opportunity for value investors to initiate positions and wait for the rest of the market to take notice. Take a look and see if your portfolio could use the mass exposure to the home building industry that Masco can provide. 

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