Stop me if you've heard this one before. A company makes consumer goods. A major input in its manufacturing process is oil and/or chemicals, and the prices of those inputs have been rising.
Mohawk Industries (NYSE:MHK), one of the largest makers of floor coverings, is suffering a bit from the high price of oil and chemicals. With fiber (almost always a synthetic like nylon) and resin constituting 60% of the company's costs, it's no surprise the company is feeling pinched.
Sales were up about 8% for the fourth quarter, but net income was flat. Aside from input costs, the company also suffered from fewer days in the 2004 quarter vs. the 2003 period. Gross margins slipped only about 20 basis points as the company managed to offset costs with higher prices, but operating margins dropped by a full percentage point vs. the previous year.
While inventories grew 22% for the year (vs. the 18% growth in top-line sales), this is not yet a major cause for concern. The company had been improving its inventory management over the past few years, but it might have pushed a little too far and left inventory levels a bit lower than they would like.
Free cash flow was also a disappointment, as increased use of working capital led to a lower result. For 2004, the company produced about $136 million in FCF, vs. $195 million in 2003.
In the longer term, the floor-covering industry looks to be heading toward a duopoly with Mohawk and Shaw, a unit of Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb), dominating the business.
Having a Berkshire subsidiary as your prime competitor is a consummate good news/bad news sort of situation. On one hand, Berkshire adheres to generally strict cash-flow targets for its subsidiaries, so it's unlikely that Shaw is going to want to compete on price and thus poison the well for Mohawk and itself alike. On the other hand, Berkshire doesn't buy companies unless they have great management, so Mohawk should expect Shaw to remain a very strong competitor.
Mohawk's return on equity is pretty respectable (almost 15%) and the company has a very manageable 25% debt-to-capitalization ratio, but the stock doesn't seem especially compelling at current prices.
Fool contributor Stephen Simpson has no ownership interest in any stocks mentioned.
