As part of its new North American leadership changes, this turnaround flooring company just named a new CFO from International Paper, who will replace the current retiring Chief Financial Officer.
Mohawk Industries, Inc. (MHK)
From The Turnaround Letter
Mohawk Industries, Inc. (MHK) is the world’s largest flooring manufacturing company, with the leading market share in North America and significant sales of carpeting, ceramic and natural stone tiles, wood and other flooring around the world. The company was founded in 1875 by William Shuttleworth in New York’s Hudson Valley as a carpet weaving company. After a large merger in 1956 and a go-private transaction in 1988, Mohawk returned to public ownership in 1992. Since then, it has grown through over 40 acquisitions to become a fully-integrated manufacturer of all major flooring products with sales in over 170 countries.
Investor enthusiasm for Mohawk’s impressive growth drove its shares to over $280 by early 2018. Since then, emerging concerns about global economic growth, combined with a series of disappointing earnings reports starting in mid-2018, led investors to abandon Mohawk shares.
The near-term outlook remains uninspiring: growth is slowing in North America, Europe and Australia, its costs for raw materials, freight and labor are starting to edge upwards and the strong dollar is hurting its overseas profits. Costs related to the ramp-up of several new
products and manufacturing facilities, which should produce strong long-term profits, are further weighing on near-term margins. The company guided toward weak first quarter results that were 10% below consensus estimates.
Mohawk stock now trades for about half its prior high as investors seem to be in no mood to wait for better results. Despite investors’ frustrations, Mohawk remains a well-managed and well-positioned company. Its strong record of innovation and global expansion helps preserve its market-leading position and reputation for quality. Near-term costs related to new initiatives will be more than offset with new revenues when its facilities reach full production. Recent
price increases should help recover much of its higher costs, while steps to reduce headcount and improve its operating efficiency will likely boost margins.
New leadership in its North American flooring unit should lead to better execution. Its sizeable remodeling-driven revenues will dampen any risks of further slowing in demand from new construction. Also, its $250 million November acquisition of Eliane, a high-end leader in Brazil’s large and strengthening ceramics market, offers new growth opportunities. In Europe, Mohawk is shifting some production to more profitable facilities, as well as continuing to introduce new and innovative products to preserve its margins.
Mohawk’s financial condition is healthy. Debt of $3.3 billion is less than 1.8x EBITDA, with all but $700 million in bonds due in 2022 or later. It produces generous free cash flow, likely to be
approaching $1 billion this year, as heavy spending on new capacity and acquisitions winds down.
With its shares trading at about 8.1x this year’s EBITDA, Mohawk shares offer longer term investors the potential for solid returns.
We recommend buying Mohawk Industries shares (MHK) with a 220 price target.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, March 8, 2019