Mohawk Industries: Winner In The Long Run
Summary
- MHK recently announced its Q1 FY23 results with declining net sales and income.
- Short-term headwinds might hamper its growth, but in the long run, MHK has great growth potential.
- The technical setup is excellent, and the valuation also looks fine.
- I assign a hold rating on MHK.
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Mohawk Industries (NYSE:MHK) manufactures and distributes flooring products for residential remodeling and new construction channels globally. They operate in three segments: Flooring North America, Global Ceramic, and Flooring Rest of the World. In the global ceramic segment, they offer ceramic tile, natural stone, porcelain slabs, and installation materials. In the flooring NA segment, they provide floor covering products like broadloom carpets, rugs and mats, laminate, and wood flooring. In the flooring ROW segment, they offer laminate, wood flooring, roofing panels, and mezzanine flooring products. MHK recently posted Q1 FY23 results. In this report, I will analyze its performance in Q1 FY23 and talk about its valuation and the company's future. Looking at the short-term headwinds, I assign a hold rating on MHK stock.
Financial Analysis
MHK recently announced its Q1 FY23 results. The net sales for Q1 FY23 were $2.8 billion, a decline of 6.9% compared to Q1 FY22. I believe the major reason behind the decline was poor performance in all three company segments. The sales of global ceramic, flooring NA, and flooring ROW segments dropped by 0.5%, 11.1%, and 9.7% in Q1 FY23 compared to Q1 FY22. I believe volume declines in all regions affected their global ceramic segment revenues. In addition, the flooring NA segment saw weakness across almost every product category, which I think led to a decline in the revenues in the flooring NA segment. Finally, about the flooring ROW segment, I think the weakness in the housing-related purchases in Q1 FY23 had an adverse effect on its flooring products sales which led to disappointing results in the flooring ROW segment. The operating margin of all three segments also declined. I think the higher interest rates impacted the operating margin of the global ceramic segment. The operating margin in the flooring NA segment was affected by the housing market's slowdown, and the flooring ROW's operating margins were impacted by higher inflation and temporary plant shutdowns.
Seeking Alpha
The net income for Q1 FY23 was $80.2 million, a decline of 67.2% compared to Q1 FY22. I believe the main reason behind the rise was increased costs and expenses, especially in product development costs and higher company spending on marketing. In my opinion, the financial results of MHK were disappointing, and it was certain that they might struggle financially in the short term due to the tough market conditions. The housing market has been struggling since 2022, and it has affected almost everyone in the sector; so, in my opinion, the decline in net sales is not a big concern because once the housing market recovers, then I think the company might get back on track.
Technical Analysis
Trading View
Personally, I really like the technical chart of MHK. I personally like to trade this type of setup. If we look at the chart, the stock is trading at $101 and has formed a double bottom pattern which is considered a bullish pattern. The stock is below its 200 ema, which shows that it is in a downtrend, and the double bottom pattern might be a sign of a trend reversal. In addition, the downside risk is minimal because the next support zone is around $60, and the stock reached the $60 level in 2020 due to the Covid crash, and I believe there is no major reason the stock might crash again to the $60 level from $101. So if there are investors who trade only using technical analysis, this can be a perfect setup for you.
Should One Invest In MHK?
There are various short-term headwinds that they are facing and might continue to face in 2023. Like the weak market conditions, weak housing market, and high inflation. It is most certain that they might struggle financially in FY23, and we can expect poor revenue growth in the coming quarters. This might affect the financials of MHK in the short term, but I am positive about the company in the long run. I think the weakness might remain in the market in 2023, but when the market is back to normal conditions, I think MHK might outperform its competitors because the management has already started taking steps to boost revenue growth in the long run. They are strengthening their business globally where they have a comparatively weak market presence, like they completed two acquisitions in Brazil and Mexico. These two acquisitions have combined sales of $425 million which is almost double the company's current sales in those regions. The management is also focusing on reducing its costs and expenses, which I believe was the major reason behind the decreased net income in Q1 FY23. Hence I believe they have great growth potential in the long run, but due to short-term headwinds, I believe it is best to wait for the market to return to normal conditions to make investment decisions, and even after loving the technical setup of MHK, I assign a hold rating on MHK.
Now let's look at the valuation of MHK. I will use EV / EBIT and P/E ratios to judge its valuation. MHK has an EV / EBIT (FWD) ratio of 11.61x compared to the sector ratio of 12.87x. Likewise, MHK has a P/E (FWD) ratio of 11x compared to the sector ratio of 13.88x. Both these ratios are reliable valuation metrics, and after looking at both ratios, I believe they are undervalued and have excellent growth potential.
Risk
The U.S. and global economies significantly impact the floor-covering industry and the Company's business. End users typically spend less on home remodeling during periods of economic instability or decline, which is how the Company gets most of its revenue. Similar to how new home construction slows down during recessions, so does the need for new flooring materials. In the not-too-distant future, the cyclical industry could decline internationally or in the local marketplaces where the Company conducts business due to downturns. A sizable or protracted fall in residential or commercial remodeling or new building activity might significantly harm the Company's operations and financial performance.
Bottom Line
Despite loving the technical setup, I am assigning a hold rating on MHK due to tough market conditions. The company might continue to struggle in 2023, but I believe they have great growth potential in the long run. Hence I would advise holding the stock for now.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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