Mohawk Industries Inc. (MHK) is a well run company that has great potential for growth in the future. It has grown substantially in the last 15 years due to a spate of acquisitions that have made it a leader in many industries. Mohawk benefits from its good management, innovative technologies, wise acquisitions, and a very good balance sheet. In addition, the stock is not too expensive, thus making the company very attractive.
Some factors that make Mohawk a buy:
1. Business Model:
Mohawk sells quality products and maintains leaderships in many "floor covering product" industries. It distinguishes itself with its wide range of products, and several best selling brands. It also excels due to its patented designs that generate licensing revenue. With its really good management, frequent acquisitions, and innovative and wide ranging products, Mohawk has established for itself a sustainable business model.
The company is the second largest producer (form 10K) of carpets and rugs in the world based on its 2011 net sales. The company offers carpets and rugs in all price ranges. Their brand, Karastan, is the leader in the high end market. Also, the company is the largest producer of ceramic tiles in the US. It is substantially larger than the next largest competitor, and is the only significant manufacturer that has its own North American Distribution system.
The company is one of the largest manufacturers and distributors of hardwood flooring in the US. In addition, it has a competitive advantage in its laminate flooring unit (Unilin) due to "Unilin's industry leading design, patented technologies and brands." This allows the company to distinguish its laminate and hardwood flooring and it provides a source of additional revenue for the company from licensing royalties. For instance, Unilin "commercialized direct pressure laminate (DPL), a technology used in a majority of laminates today, and has developed the patented UNICLIC ® glueless installation system and a variety of other new technologies, such as beveled edges, multiple length planks and new surface and finish features from which the company generates licensing revenue."
To widen its product range and achieve greater economies of scale, Mohawk frequently acquires its competitors. For instance, Mohawk recently completed its purchase of Marazzi Group, one of the world's largest tile companies. This acquisition has made Mohwak the largest worldwide ceramic tile manufacturer. In the U.S., Marazzi was the second-largest tile supplier behind Dal-Tile(owned by Mohawk). Marazzi was focused on the residential market, which complements Dal-Tile's stronger commercial presence. As a result of the acquisition, the company hopes to optimize manufacturing assets and improve efficiencies.
Mohawk has done a good job of leveraging its innovative technology and its good distribution system to grow its business. In addition, the acquisitions help it maintain its leadership in the industry and achieve economies of scale. The company does have a good business model and should continue to do well for the above reasons.
Mohawk has the right management for its future growth plans. The company is led by the company's CEO, Jeffrey S. Lorberbaum, who also owns a 14% stake in the company. He's been associated with the company for a very long time. In 1975, his father founded Aladdin Mills, which originally made bath mats. Alladin Mills was sold to Mohawk in 1994.
Lorberbaum has grown his company largely through acquistions. Mohawk's most important assets were acquired by the company under his leadership. Case in point is the purchase of Dal-Tile and Unilin. Loberbaum has over 35 years of experience in the rug business and is still very very passionate about it. Lorberbaum is the ideal manager for a growing company. He has the passion and enthusiasm to help Mohawk maintain its edge and continue to grow.
3. Cash Reserves:
On March 30th, 2013 (form 8K), Mohawk had current assets of $3.4 billion, and current liabilities of $877 million. This gives the company a current ratio of 3.8. The company has very high cash reserves and is doing a fine job of increasing the long term security.
The long term debt to equity ratio seems relatively low at .6. However, this ratio may go up as the company continues the acquisitions. The company must not get carried away and let the debt rise, since that would be make it a risky proposition for long term investors. Long term investors like companies that have steady earnings and low debt ratios.
As things stand, the company is doing a good job of managing its cash reserves and debt ratios, thus making the stock very attractive for long term investors.
4. Risk Factors:
The chief risk Mohawk faces is an adverse change in management. If the current CEO, Jeffrey S. Lorberbaum, decides to divest the business and leave his position as CEO, the company may lose its current advantage of having a very keen and experienced manager.
In addition, Mohawk must continue to innovate and come up with industry leading products. This would require extra emphasis and investment in R&D. Lastly, the company must continue to acquire its competitors in order to increase economies of scale.
Any change in the current business model or any of the factors listed above could adversely change the investment advice offered here.
5. Stock Price:
Not surprisingly, the trailing P/E ratio is slightly high at 31. This is higher than the S&P 500 mean P/E ratio of 18.66. Mohawk does not pay a dividend since it utilizes the extra cash for making acquisitions. So far, the company has made good purchases and has increased its economies of scale and widened its competitive advantage.
Based on the stock price, the company is a good buy for long term investors.
Mohawk is a "BUY" for long term investors (investors who hold stock for the foreseeable future and would continue to hold it unless the fundamentals of the business change significantly). Mohawk's biggest strength is its good management, primarily its CEO. His leadership should help the company grow leaps and bounds in the future. Any adverse change in the business model, management, or the balance sheet could alter this opinion of the company.