Investing can be scary. This is especially true when the company you own shares in lowers guidance for the current fiscal year and warns of weakening demand when it comes to its offerings. A fantastic example of this can be seen by looking Masco Corporation (NYSE: MORE). This company, which operates as a provider of construction and home improvement products such as paint, bath and shower fixtures, faucets and more, recently announced that it would lower expectations for fiscal year 2022. This is certainly painful and I understand why the The company’s shares have now fallen more than with the broader market. Having said that, for those who can weather the storm, now might be a good time to consider buying. This is not to say that travel in the future would be fantastic. Surely, it will be accident. But for those focused on the long term, the company could well be a strong prospect right now.
A revision in expectations
The last article I wrote about Masco was published in early August of this year. In that article, I talked about how the company had been experiencing some share price weakness even though the company’s overall financial performance was improving. At the time, stocks weren’t exactly cheap. But I also said they weren’t expensive either. Add to this the fact that the company was going through an accelerated share buyback, and I was generally pleased with each company’s track record. But given the state of the economy and the stock price, I ended up rating ‘hold’, reflecting my belief at the time that the stock should deliver a return that more or less matched the advance of the broader market. So far, this call hasn’t gone exactly as planned. While the S&P 500 is down 7.3%, Masco shares are down 11.8%.
It would be wrong of me to say that this negative disparity is not justified. Truth be told, it probably was. To see what I mean, we only need to look at the financial performance that covers the third quarter of the company’s fiscal year 2022. This is the only quarter for which new data is available that was not available when I last wrote about the company. During that quarter, revenue reached $2.2 billion. This matches exactly what the company generated in the third quarter of 2021. While this may seem neutral, consider that the financial performance covering the first three quarters of the year as a whole was better year over year than what the third quarter demonstrated. trimester alone. Strong demand for some of the company’s products (particularly its plumbing and paint products) and higher prices for its products were instrumental in driving sales year over year. Now, for the first three quarters of 2022 combined, revenue was $6.76 billion. That’s 6.4% above the $6.35 billion generated a year ago.
The company’s struggles were even more apparent when looking at the final results. During the third quarter, net income was $218 million. That’s less than the $220 million reported a year ago. Operating cash flow decreased from $356 million to $346 million. Meanwhile, adjusting for changes in working capital, the decrease would have been $294 million to $292 million. And finally, the company’s EBITDA also worsened, falling from $421 million to $385 million. Unlike the case for revenue, this bottom line performance was helpful in driving the overall financial performance in the company’s bottom line for the first three quarters of this year. Although net income of $729 million is still significantly higher than the $278 million generated in the first nine months of last year, other profitability metrics don’t look so good.
Operating cash flow decreased from $595 million to $520 million. True, using the adjusted figure, it would have actually increased from $904 million to $954 million. At the same time, however, the company’s EBITDA fell from $1.3 billion to $1.23 billion. Once again, none of this should come as a huge surprise to investors. In the company’s most recent quarterly report, for example, they even said that current and changing market conditions may not only reduce demand for their offerings, but also lead to high commodity and other input costs, transportation costs higher costs and disruptions in the supply chain. . It’s also unclear whether the company can more than offset these cost increases by raising the price of its offerings. Recently, the answer seems to be no.
Given these concerns, management recently reduced guidance for the current fiscal year. They now anticipate earnings per share of between $3.70 and $3.80 on an adjusted basis. This compares to the previous expectation of between $4.15 and $4.25. At the midpoint, the earnings should translate to net income of $851.3 million. And if we annualize the results experienced for the rest of the year, we should anticipate adjusted operating cash flow of $981.4 million and EBITDA of $51 billion. These numbers would imply a price-to-earnings multiple at the company of 12.2, a price-to-adjusted operating cash flow multiple of 10.6, and an EV-to-EBITDA multiple of 8.8. In two of these three cases, as the table above illustrates, stocks still look cheaper than if we used 2021 data. Interestingly, as the table also illustrates, our guidance for 2022 now requires stocks to be slightly cheaper, particularly from a cash flow perspective, than the last time I wrote about the company. To put all of this into perspective, I also compared the company to five similar companies. On a P/E basis, these companies ranged from a low of 4.2 to a high of 26.4. And using the EV to EBITDA approach, the range was between 2.7 and 15.4. In both cases, four of the five companies were cheaper than Masco. Meanwhile, using the price to operating cash flow approach, the range was between 3.8 and 94, with two of the five cheaper than our prospect.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Advanced Drainage Systems (WMS)||26.4||21.4||15.4|
|FirstSource Builders (BLDR)||4.2||3.8||3.1|
|Simpson Manufacturing (SSD)||10.7||16.4||8.0|
|Owens Corning (OC)||6.2||5.9||4.2|
|Steel Industries (IIN)||4.3||94.0||2.7|
Given what we are seeing today, I understand why some investors would be cautious when it comes to Masco. In truth, we could see additional pain in the future based on the data available now. At the same time, for those who believe in long-term prospects, they could understand the decision to buy shares of the company. This is especially true when you consider how much stocks have become cheaper in just a couple of months. But even with that being the case, stocks aren’t cheap enough to pull the trigger given the uncertainty the future holds. So even though the company is starting to look more appetizing, I’ve decided to keep the ‘hold’ rating that I have for now.