Mohawk Industries - Momentum

MHK 012612

Mohawk Industries Inc (MHK)

There are many industry insiders who believe housing is making a turnaround.  I have yet to agree that the action in housing we are seeing is substantial in terms of price. 

One thing we do have is new and existing home sales on the rise.  This to me is a positive for a company like Mohawk.  Whether you think that the average consumer is finally buying houses on confidence or that investors are simply scooping up great deals at rock bottom prices, both buyers will likely have repairs to make. 

The most common and sometimes most valuable is flooring and that is where Mohawk comes in.

Company Description & Developments
Mohawk is a primary supplier of residential and commercial flooring. The company offers a complete selection of carpet, ceramic tile, wood, stone, laminate, vinyl, rugs and other home products.

You may be familiar with their name brands in the industry, which include Mohawk, Karastan, Ralph Lauren, Lees, Bigelow, Quick Step, Dal-Tile and American Olean.

Their flooring is everywhere; from small boutiques and factory direct shops to major retailers across the country and the world including Home Depot, Bloomingdales, Lowe’s, Macy’s, Target, Wal-Mart and more.

Mohawk also runs its own trucking fleet and operates over 300 local distribution locations.

Here are some housing numbers to think about:

• Existing Home sales rose 5.0% in December to an annual rate of 4.61 million
• Relative to a year ago, sales are up 3.6%
• Sales of single family homes were up 4.6% to an annual rate of 4.11 million, and were 4.3% above a year ago
• Condo sales were up 8.7% from November to an annual rate of 500,000
• The median price of an existing single family home was down 2.5% from a year ago to 165,100
• The median price of a previously owned condo fell 3.0% to $160,000.

This tells me that more homes are changing hands, but still at lower prices.  The bulk of home sales are distressed, existing homes (foreclosures) that most likely require some “work” to become not just livable, but appealing to the new buyer.

If the activity is all investors, chances are they are also going to be replacing flooring, but most likely using cheaper solutions like carpet. 

Either way, I think the present environment bodes very well for companies like MHK.  Mohawk’s financials and stock price are beginning to reflect this thesis after a couple rough earnings quarters. 

Think of them as the second derivative to a housing and consumer recovery. 

Financial Profile
Mohawk is a mid-cap company (4.38 billion) that is trading at about 22 times trailing earnings (P/E).  Looking forward, Zacks Consensus Estimates are calling for that number to drop to 17 with no change in price from these levels.  

Mohawk hit the Zacks Rank 1 Strong Buy list January 26th, coming from a Zacks Rank 3 about a week ago.

Mohawk reported a 2% quarterly sales decrease at their last earnings report, but showed year over year sales growth of 10% and a 12% rise in earnings per share in the same period with total sales of roughly 5.3 billion in FY2010.  Mohawk is expected to earn $2.92 in FY2011 according to the Zacks Consensus Estimate. 

Earnings Estimates
Even with several tough quarters, we saw at least one analyst revise next quarter and next year’s earnings estimates up within the past month.  The others have stood firm on their estimates to date.  Mohawk will report Q4 results on February 23rd.

Expectations are for Mohawk to generate $0.72 in income this quarter.  Of the 11 analysts who cover Mohawk, the consensus is for the company to grow earnings by 17.85% in FY2011 with another jump of 25.38% in FY2012.

In terms of the magnitude of analyst estimate trends, we are seeing all of the consensus estimates lower than they were 90 days ago from current quarter, out to FY 2012.  Analysts may still make adjustments ahead of the next report. 

Mohawk missed estimates last quarter by 3.49%, which they warned of.  But the average earnings surprise is still a positive 4.82% over the past year. 

Market Performance & Technicals
Mohawk stock has just recently begun picking up momentum.  October marked the start of a major rally for MHK.  The stock finds itself in a clean, strong bullish channel and has been making a series of higher highs and lower lows over the past 2 months. 

Mohawk’s 52 week high of $68.86 was made back in May of 2011.  MHK has remained above its 50 day moving average since early October and just recently jumped above its 200 day moving average which currently stands at $55.05.

Even with its struggles in 2011, Mohawk still managed to outpace the S&P 500 by 6% over the past year and almost 15% over the last twelve weeks.  The recent retracement in MHK is healthy if it is going to continue its bullish momentum.

Jared A Levy is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Whisper Trader Service.

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