Flooring manufacturer Mohawk Industries (NYSE:MHK) reported Q4 FY2023 results topping analysts' expectations, with revenue down 1.4% year on year to $2.61 billion. It made a non-GAAP profit of $1.96 per share, improving from its profit of $1.32 per share in the same quarter last year.
Mohawk Industries (MHK) Q4 FY2023 Highlights:
- Revenue: $2.61 billion vs analyst estimates of $2.57 billion (1.8% beat)
- EPS (non-GAAP): $1.96 vs analyst estimates of $1.86 (5.4% beat)
- Free Cash Flow of $55.96 million, down 85.5% from the previous quarter
- Gross Margin (GAAP): 24.6%, up from 22.4% in the same quarter last year
- Market Capitalization: $6.94 billion
Established in 1878, Mohawk Industries (NYSE:MHK) is a leading producer of floor-covering products for both residential and commercial applications.
The company's product portfolio includes carpets, rugs, ceramic tile, laminate, wood, stone, and vinyl flooring, catering to diverse consumers and commercial needs.
To capture market share, the company has developed new technologies and materials for flooring, such as its SmartStrand carpet, which features built-in stain resistance, and its RevWood laminate, known for its durability and natural appearance. These features are designed to enhance product longevity.
Mohawk Industries’ strategy includes expansive acquisitions and partnerships. The company has acquired several key players in the flooring industry, such as Marazzi Group and IVC Group. These deals increased Mohawk's geographic footprint and ability to cater to varying market preferences and trends.
The company's distribution and sales strategy is another key factor. Mohawk Industries utilizes a multi-channel approach, selling through independent distributors, retailers, home centers, and its own retail showrooms. This broad distribution network enables the company to effectively reach a wide customer base, providing flexibility and convenience for its consumers.
A healthy housing market is good for furniture demand as more consumers are buying, renting, moving, and renovating. On the other hand, periods of economic weakness or high interest rates discourage home sales and can squelch demand. In addition, home furnishing companies must contend with shifting consumer preferences such as the growing propensity to buy goods online, including big things like mattresses and sofas that were once thought to be immune from e-commerce competition.Mohawk Industries' primary competitors include Shaw Industries (owned by Berkshire Hathaway NYSE:BRK.A), Armstrong Flooring (NYSE:AFI), Tarkett (EPA:TKTT), Interface (NASDAQ:TILE), and private company Mannington Mills.
Exploring a company's long-term performance can offer valuable insights into its business quality. Any business can experience brief periods of success, but distinguished ones maintain steady growth over time. Mohawk Industries's annualized revenue growth rate of 2.2% over the last 5 years was weak for a consumer discretionary business.
Within consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. Mohawk Industries's recent history shines a dimmer light on the company, as its revenue was flat over the last 2 years. We can dig even further into the company's revenue dynamics by analyzing its organic sales, which strip out currency fluctuations and one-time events like acquisitions. Over the last 2 years, Mohawk Industries's organic sales averaged 1.7% year-on-year growth. Because this number is higher than its revenue growth during the same period, we can see that non-fundamental factors hindered its top-line performance.
This quarter, Mohawk Industries's revenue fell 1.4% year on year to $2.61 billion but beat Wall Street's estimates by 1.8%. Looking ahead, Wall Street expects revenue to decline 2.5% over the next 12 months, a deceleration from this quarter.
Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.Mohawk Industries was roughly breakeven when averaging the last two years of quarterly operating profits, weak for a consumer discretionary business.
This quarter, Mohawk Industries generated an operating profit margin of 6.4%, up 4.1 percentage points year on year. This increase indicates the company was more efficient with its expenses over the last quarter, spending less money in areas like corporate overhead and advertising.Over the next 12 months, Wall Street expects Mohawk Industries to become profitable. Analysts are expecting the company’s LTM operating margin of negative 2.6% to rise to positive 7.8%.
We track long-term historical earnings per share (EPS) growth for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Over the last 5 years, Mohawk Industries's EPS dropped 25.5%, translating into 5.7% annualized declines. We tend to steer our readers away from companies with falling EPS, especially in the consumer discretionary sector, where diminishing earnings could imply changing secular trends or consumer preferences. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).
In Q4, Mohawk Industries reported EPS at $1.96, up from $1.32 in the same quarter a year ago. This print beat analysts' estimates by 5.4%. Over the next 12 months, Wall Street expects Mohawk Industries to grow its earnings. Analysts are projecting its LTM EPS of $9.19 to climb by 3.8% to $9.54.
Cash Is King
If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
Over the last two years, Mohawk Industries has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 3.6%, subpar for a consumer discretionary business.
Mohawk Industries's free cash flow came in at $55.96 million in Q4, equivalent to a 2.1% margin, down 38.5% year on year. Over the next year, analysts' consensus estimates show they're expecting Mohawk Industries's LTM free cash flow margin of 6.4% to remain the same.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).
Mohawk Industries's five-year average return on invested capital was 4.4%, somewhat low compared to the best consumer discretionary companies that pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, over the last two years, Mohawk Industries's ROIC has averaged a 8.6 percentage point decrease each year. In conjunction with its already low returns, these declines suggest the company's profitable business opportunities are few and far between.
Key Takeaways from Mohawk Industries's Q4 Results
It was good to see Mohawk Industries beat analysts' revenue expectations this quarter. That stood out as a positive in these results. On the other hand, its EPS missed analysts' expectations. No forward guidance was given with the earnings release. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is flat after reporting and currently trades at $109.61 per share.
Is Now The Time?
Mohawk Industries may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of Mohawk Industries, we'll be cheering from the sidelines. Its revenue growth has been weak over the last five years, and analysts expect growth to deteriorate from here. On top of that, its declining EPS over the last five years makes it hard to trust, and its declining ROIC shows its profitable business opportunities are shrinking.
Mohawk Industries's price-to-earnings ratio based on the next 12 months is 11.5x. While we've no doubt one can find things to like about Mohawk Industries, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.
Wall Street analysts covering the company had a one-year price target of $110.40 per share right before these results (compared to the current share price of $109.61).
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