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In an interview with Barron's, Off Wall Street Consulting founder Mark Roberts said "the weakness in the housing market, which has all kinds of ramifications for consumers and sales of consumer goods, and the extraordinarily high profit margins of corporations don't seem like a recipe for a strong market". His firm already closed out profitable short positions in mortgate lender InyMac Bancorp (NDE) and Williams Scotsman (WLSC), which rents trailers to construction sites. His top pick for a housing sector related short is now carpet manufacturer Mohawk Industries (NYSE:MHK). According to Roberts:

  • 35% of Mohawk's business comes from new residential construction, 40% from carpet replacement and 25% from commerical demand.
  • Mohawk's earnings are at risk because housing starts were off 35% year over year and subprime mortgage lenders have run into trouble. "We have called carpet dealers all over the country and, except for a couple of pockets, business is terrible. Carpet dealers have told us their business is very, very bad."
  • Mohawk's carpet business sales have been weak. Segment unit sales declined in every quarter of 2006 despite two double digit price increases over the last 14 months, and carpet sales were declined in Q4 2006.
  • Analysts forecast Mohawk's 2007 EPS at about $6.46, whereas EPS in fact will be closer to $5.94, down from $6.57 EPS in 2006.
  • Mohawk will earn about $6 in 2008 versus consensus of $7.

Robert's predictions are consistent with a recent article in Bloomberg which argued that January's weak housing starts will hit the wider economy at the end of 2007 (summary here). But they contradict a bullish article about Mohawk by Tom Sullivan in the February 5th edition of Barron's (summary here).

Source: Short Plays for More Housing Market Weakness