Wide-Moat Masco Is Mostly Exposed to the Less-Cyclical Repair and Remold Market

Business Strategy & Outlook:

Company thinks Masco’s financial performance over the past eight years has been as much of a self-help story as a story of improving end markets. Masco almost entirely refreshed its senior executive management team in 2014. Since then, it has taken significant measures to build a stronger and more consistent business model. The firm divested its most cyclical and least profitable businesses (it spun off its installation business, now named TopBuild, to shareholders in 2015 and sold its windows and cabinetry businesses in 2019 and 2020, respectively). Management also executed significant cost-reduction initiatives and shored up the firm’s balance sheet. According to the company, Masco’s sale of its windows and cabinetry businesses was a positive development for the firm because it had long viewed its plumbing and decorative architectural businesses as the firm’s crown jewels and key drivers of the company’s valuation, while Masco’s cabinetry and windows businesses were often laggards that had been a drag on margins and returns on invested capital.

Repair and remodel, or R&R, spending, and to a much lesser extent, new residential construction, are major drivers of Masco’s financial performance. After divesting its installation, windows, and cabinetry businesses, the firm’s overall exposure to the R&R market is 88% of sales. R&R spending surged during the pandemic, but the company doesn’t expect a dramatic downturn in home improvement projects, although the amount spent per project could moderate over the near term resulting in flattening growth over the next couple years. Historically, project incidence has been relatively stable, but average project expenditure is more sensitive to macroeconomic conditions. Nevertheless, it will continue to see a 4%-5% long-term growth trajectory for R&R spending. The company expects the repair and remodel market will benefit from several long-term secular tailwinds related to aging housing stock, favorable demographics, and increased acceptance of smart home and energy-efficient products and solutions.

Financial Strengths:

Company thinks Masco has a sound capital structure, and its consistent free cash flow generation should easily support its debt-service requirements and future capital-allocation decisions. Masco’s balance sheet has improved significantly over the past five years; based on calculations, net debt/EBITDA peaked at over 4 in 2011 but is now 1.7. Masco plans to maintain a similar leverage ratio to support an investment-grade debt rating. Masco has approximately $3 billion of outstanding debt with maturities staggered through 2051, but the next maturity isn’t until 2028 when $600 million is due. Masco has ample liquidity, with roughly $500 million of cash on hand and over $700 million available on its credit facility. By calculations, 2021 marked the 31st consecutive year Masco has generated positive free cash flow since financials were publicly available via the Securities and Exchange Commission website (1991). This ability to generate consistent free cash flow, even in a downturn, demonstrates the durability of Masco’s business model.

Bulls Say:

The R&R market is poised for long-term growth, driven by several secular tailwinds, including the aging housing stock and favorable demographics.
Masco has attainable growth plans for its plumbing and decorative architectural segments. These strategies could drive meaningful above-market growth over the next several years.
Masco’s brand portfolio enjoys pricing power, which supports margin stability.

Company Description:

Masco manufactures a variety of home improvement and building products. The company’s $5.1 billion plumbing segment, led by the Delta and Hansgrohe brands, sells faucets, showerheads, and other related plumbing fixtures and components. The $3.2 billion decorative architectural segment primarily sells paints and other coatings under the Behr and Kilz brands, but it also sells builder hardware and lighting products.

(Source: Morningstar)

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