Mohawk Industries: Strong Growth, But Competes With Buffett (MHK)

Mohawk Industries Inc. (MHK) is the second largest US manufacturer of flooring products. A dull industry perhaps, but MHK has a long term record of growing by acquiring and integrating other companies. Take a look at their ten year history of sales and net income growth ($millions):

Year…..Sales…..NI
2005….6620…..358
2004….5880…..369
2003…..5005…..310
2002…..4522…..285
2001…..3446…..189
2000…..3256…..163
1999…..3083…..157
1998…..2639…..108
1997…..1901…..68
1996…..1795…..49
(Source: MSN Money)

Mohawk CEO Jeffrey Lorberbaum is certainly incentivized to see MHK’s share price grow. He owns close to 20% of the company. He has sold millions of dollars worth of shares this month, although we don’t know whether that was to diversify his holdings or for other reasons.

Nominally, profit margins at MHK aren’t especially high, although they are better than most competitors. Morningstar’s latest report on the company commented, “Since 2000, the company has averaged 10.4% operating margins, far superior to those of publicly traded rivals."

Being one of the biggest players in the industry gives Mohawk certain competitive advantages in the form of an economy of scale and a huge distribution channel. That said, it’s still second to Shaw Industries Inc., a private company owned by Warren Buffett’s Berkshire Hathaway. With Berkshire owning Shaw, you have, on the one hand, Buffett’s implicit approval of the value of owning a top name in the flooring industry. On the other hand, Mohawk has to compete against a player with vast resources and the benefit of Buffett’s oversight.

Several smart funds have been willing to make the bet on Mohawk. Major owners of the company’s shares include Ariel Capital Management, Sequoia Fund, and Muhlenkamp Fund.

Mohawk bears will argue that the company is subject to housing market risk and recent rises in raw material costs. Their arguments are valid. We’ll also point out that the company, despite being a stable business, pays no dividend and has a not trivial amount of debt. Reuters puts the debt/equity ratio at 1.09.

Yahoo Finance shows a trailing P/E for Mohawk of 15.46 and a forward P/E of 10.89. It trades at 1.9 times book value and 9.87 times operating cashflow. These numbers may be updated shortly since the company just announced reduced guidance and was downgraded by Avondale Partners. In reaction, shares of Mohawk dropped on Friday.

You can hear a reply of the company's conference call here.

MHWK 1-yr chart: