One part of the economy that has been particularly hot as of late has been the real estate market. Whether it be buying a home or fixing one up, demand for housing and housing-related goods has risen significantly over the past year. One of the companies that has been a beneficiary of this paradigm shift is a firm called Masco (MAS). This may lead some investors to worry that we could see an eventual downturn following the strong demand. But the good thing about this business is that, from a cash flow perspective, it has remained remarkably consistent over the past few years, even preceding the increase caused by recent economic factors. Having said that, shares of the company, while not exactly expensive, are definitely not on the cheap side either. Relative to similar firms, Masco might be considered a bit lofty, while on an absolute basis, the company is likely more or less fairly valued.
A home improvement & building products play
Masco describes itself as a manufacturer and distributor of branded home improvement and building products. The company’s portfolio includes significant brands such as BEHR in the paint market, Delta and Hansgrohe in the faucet, bath and shower fixtures space, Kichler in the decorative and outdoor lighting market, Liberty in the decorative and functional hardware market, and Hot Spring in the spa market.
Operationally, Masco is organized today into two key segments. The first of these is the Plumbing Products segment. Through this, the company sells plumbing products such as faucets, showerheads, handheld showers, valves, bath hardware, and other related products. They also manufacture acrylic tubs, bath and shower enclosure units, and other related devices. Their spas, exercise pools, and fitness systems also fall under this segment. On top of this, the company also sells brass, copper, and composite plumbing system components and other non-decorative plumbing products that are sold to various customers across North America. Based on data from the company’s 2021 fiscal year, this particular segment accounted for 61.3% of the company’s overall revenue and 61.5% of its operating profits.
The other key segment the company has is called Decorative Architectural Products. Through this segment, the company sells things such as architectural coatings, like paints, primers, specialty coatings, stains and waterproofing products, and more. Some of its products, such as BEHR paint, are sold under exclusive agreements to various customers. In this case, BEHR is sold to The Home Depot (HD), which is currently the company’s largest customer. In addition to these core products, this segment is also responsible for the sale of branded cabinet and door hardware, functional hardware, wall plates, hook and hook rail products, and similar devices. As of the firm’s 2021 fiscal year, this segment accounted for 38.7% of the company’s overall revenue and 38.5% of its profits.
Due to a number of changes a company has made, comparable financial statements really only date back for the four years ending in 2021. Over this four-year window, however, the fundamental picture for the company has been appealing. Revenue has grown each year, climbing from $6.65 billion to $8.38 billion. The increase from 2020 to 2021 was an impressive 16.5%. Unfortunately, the same kind of trend could not be seen with profitability. Net income grew from $734 million in 2018 up to $1.22 billion in 2020. But then, in 2021, profits plunged to just $410 million. Though, to be fair, a significant portion of the pain the company experienced during that year came from a periodic pension and post-retirement benefit expense management had to payout in the amount of $430 million. This should be considered a one-time item.
When it comes to other profitability metrics, the company has been far more consistent. Between 2018 and 2020, as an example, operating cash flow remained in a narrow range between $833 million and $1.03 billion, with no real trend that could be seen. In 2021, the company stuck true to this range, generating cash flow of $930 million. However, we should also pay attention to EBITDA. According to management, this metric increased from $1.24 billion in 2018 to $1.60 billion in 2021, with year-over-year increases in every year but one.
When it comes to valuing the company, the process is fairly straightforward. Using the data from the company’s 2021 fiscal year, the price to operating cash flow multiple of the business would be 14.9. Meanwhile, the EV to EBITDA multiple of the firm would be 9.9. Due to the significant drop in profits caused by a one-time item in 2021, I figured it might make sense to go with management guidance for the 2022 fiscal year. Earnings, at the midpoint, should be about $1.01 billion for the year. If that holds true, then the price to earnings multiple of the company would be 13.8. That compares to the 11.3 that we would get if we relied on the 2020 data instead.
To put the pricing of the company into perspective, I decided to compare it to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 4.6 to a high of 19.1. Four of the five companies were cheaper than Masco. I also decided to look at the company through the lens of the price to operating cash flow multiple. This gave me a range of 6.8 to 30.1. Once again, four of the five companies were cheaper than our prospect. And using the EV to EBITDA approach, the range was 3.7 to 11.9. Perhaps not surprisingly, four of the five companies were cheaper than our target.
|Company||Price/Earnings||Price/Operating Cash Flow||EV/EBITDA|
|Cornerstone Building Brands (CNR)||4.6||8.1||3.7|
|Builders FirstSource (BLDR)||9.7||13.3||6.4|
|Simpson Manufacturing (SSD)||19.1||30.1||11.9|
|Owens Corning (OC)||10.3||6.8||6.0|
|Insteel Industries (IIIN)||9.2||10.8||5.7|
Based on the data provided, I would say that Masco makes for an interesting prospect for investors who want a home improvement and building products company. The firm has demonstrated the ability to grow over an extended period of time and cash flows remain robust. Shares are priced today at levels that are lofty compared to the competition. But on an absolute basis, I would say they don’t look so bad. They aren’t cheap, but they are at levels that would probably indicate a business that is fairly valued or slightly below that point. Even if the firm was to return to results achieved in prior years, cash flows remain robust enough to result in limited downside for investors, in my opinion.