One part of the economy that has been particularly hot lately has been the real estate market. Whether buying a home or fixing one, demand for housing and housing-related goods has increased significantly over the past year. One of the companies that has benefited from this paradigm shift is a company called Mask (MAS). This may cause some investors to worry about a possible slowdown following strong demand. But the good thing about this business is that, from a cash flow perspective, it has remained remarkably constant over the past few years, even predating the increase caused by recent economic factors. That said, the company’s shares, while not terribly expensive, are certainly not cheap either. Compared to similar companies, Masco might be considered a bit high, whereas on an absolute basis the company is probably more or less fairly fairly valued.
A play about home improvement and building products
Mask describes himself as a manufacturer and distributor of branded renovation and construction products. The company’s portfolio includes important brands such as BEHR in the paint market, Delta and Hansgrohe in the faucet, bath and shower space, Kichler in the decorative and outdoor lighting market, Liberty in the decorative and functional hardware and Hot Spring on the thermal market market.
Operationally, Masco is today organized into two key segments. The first of these is the plumbing products segment. Through this, the company sells plumbing products such as faucets, shower heads, hand showers, valves, bath hardware and other related products. They also manufacture acrylic tubs, tub and shower units, and other related fixtures. Their spas, exercise pools and fitness systems also fall under this segment. In addition to this, the company also sells brass, copper and composite plumbing system components and other non-decorative plumbing products which are sold to various customers in North America. Based on the company’s fiscal year 2021 data, this particular segment accounted for 61.3% of the company’s overall revenue and 61.5% of its operating profit.
The other key segment of the company is called decorative architectural products. In this segment, the Company sells products such as architectural coatings such as paints, primers, specialty coatings, stains and waterproofing products, etc. Some of its products, such as BEHR paint, are sold under exclusive agreements to various customers. In this case, BEHR is sold at The reception deposit (HD), which is currently the company’s largest customer. In addition to these core products, this segment is also responsible for the sale of brand name cabinet and door hardware, functional hardware, wall plates, hooks and hook rails and similar appliances. As of the company’s 2021 fiscal year, this segment accounted for 38.7% of the company’s overall revenue and 38.5% of its profit.
Due to a number of changes made by a company, the comparable financial statements only really go back to the four years ending in 2021. During this four-year window, however, the fundamental picture of the company was attractive. Revenue has increased each year 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 observed with profitability. Net income fell from $734 million in 2018 to $1.22 billion in 2020. But then, in 2021, profits dropped to just $410 million. Although, to be fair, a significant portion of the pain suffered by the company during that year stemmed from a periodic management of pension and post-retirement benefits expenses which was to pay out a sum of 430 million dollars. This should be considered a single item.
When it comes to other measures of profitability, the company has been much more consistent. Between 2018 and 2020, for example, cash flow from operations remained in a narrow range between $833 million and $1.03 billion, with no real visible trend. In 2021, the company stuck to that range, generating $930 million in cash flow. However, we also need to pay attention to EBITDA. According to management, this metric has grown from $1.24 billion in 2018 to $1.60 billion in 2021, with year-over-year increases except one.
When it comes to valuing the business, the process is quite simple. Using data from the company’s fiscal year 2021, the price to multiple of the company’s operating cash flow would be 14.9. Meanwhile, the company’s EV/EBITDA multiple would be 9.9. Due to the significant decline in earnings caused by a one-time item in 2021, I thought it might be wise to follow management’s guidance for fiscal 2022. Earnings, mid-term, should be d about $1.01 billion for the year. If this is true, then the price to multiple earnings of the firm would be 13.8. That compares to the 11.3 we’d get if we relied on 2020 data instead.
To put the price of the company into perspective, I decided to compare it to five similar companies. On a price/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 business through the prism of price to operating cash flow multiple. This gave me a range of 6.8 to 30.1. Again, four out of five companies were cheaper than our prospect. And using the EV to EBITDA approach, the range was 3.7 to 11.9. Unsurprisingly, four of the five companies were less expensive than our target.
|Company||Prices/Benefits||Price/Operating Cash Flow||EV/EBITDA|
|Cornerstone Building Marks (CNR)||4.6||8.1||3.7|
|FirstSource Builders (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|
|Steel Industries (IIIN)||9.2||10.8||5.7|
Based on the data provided, I would say Masco is an attractive prospect for investors who want a home improvement and building products business. The business has demonstrated its ability to grow over a long period and cash flow remains strong. Shares today are quoted at high levels relative to the competition. But overall, I’d say they don’t look that bad. They’re not cheap, but they’re at levels that would likely indicate a company that’s fairly valued at or slightly below that point. Even if the company were to revert to previous years’ results, cash flow remains robust enough to cause, in my view, limited downside to investors.