Georgia-based Mohawk Industries (MHK, Financial) has grown from a carpeting manufacturer into a leading diversified flooring company generating close to $1 billion in net income on $9.8 billion in sales, 63% of which comes from inside the U.S.
The company has done a great job coming back from the 2008 financial crisis where it lost almost $1.5 billion. Acquisitions have been the central component of Mohawk’s strategy where it has completed over 42 deals in the last 25 years, first consolidating the carpet market and then expanding into other flooring categories and new markets. Mohawk is on track to produce $15 a share in 2019 on $10.6 billion in sales, pushing the book value above $125 per share.
The company's June quarterly report highlighted cost pressure resulting from price increases in raw materials and transportation coupled with a lack of skilled labor. But Mohawk continues to improve productivity and profitability with profit margins rising from 4% in 2012 to over 10% now. Patent revenues have been rising thanks to broader use of the company's intellectual property and robust worldwide sales of higher-margin luxury vinyl tile (LVT) products.
The company expects operations to improve heading into 2019 with confidence that further price increases and expansion of new products will boost the top-line over the next year to 18 months, picking up the pace over the next three to five years. The next recession will be painful, but I still believe money outflows from the stock market will trickle into real estate, and home improvement projects are rarely bad ideas for the home owner.
If the housing market remains bullish, that bodes well for Mohawk since the majority of its sales come from the U.S., with an large portion of that driven by residential replacement and new construction. U.S. housing starts are projected to reach 1.9 million units by 2021 before fading to a demographically sustainable run rate of 1.5 million annual starts. We also expect healthy ownership turnover, which is an important driver of flooring replacement -- more homes sold means more remodeling work done.
If successful, earning $15 a share in 2019 should equate to a price of $225 based on its current multiple. If that expands to the company's five-year average, investors could see a price in the mid $300 range, and the same goes for its book value multiplier as well. In either event, the current price provides 25% capital gain potential, a risk well worth taking.
In terms of guru ownership, Lee Ainslie (Trades, Portfolio) joins Ruane Cuniff with over a million shares in Mohawk. Ainslie added to his position last quarter, which now stands at 3.73% of his assets under management.
Disclosure: I am not long/short Mohawk.
