Masco (MAS)

TOP CONTRIBUTORS

Kelly Schaefer

Alan Ibrahim

Masco (NYSE: MAS) manufactures home improvement products and building supplies such as cabinetry, paints and plumbing fixtures. The company also offers installation services. Some brands owned by Masco are Kraftmaid, Delta, Peerless, Aqua Glass, Mirolin, and Behr. The company earned $7.8 billion in net sales but incurred a net loss of $140 million in 2009.^[1]

Masco's fortunes are closely linked to the U.S. housing market (80% of the company's sales come from North America), as the majority of its sales are related to new home construction and existing home sales. A weak housing market means more foreclosures, which means that home construction declines. Masco's sales depend on new housing construction because it provides many home builders with the materials they need to build a home. A weak housing market and a slow economy also means that homeowners are less likely to spend money on home improvement projects. As a result of the sluggish housing market, the company's net sales fell by 18% in 2009.^[1]

Company Overview

Products^[2]

• Cabinets and Related Products (21% of net sales): under this segment the company sells economy, stock, semi-custom, assembled, and ready-to-assemble cabinetry for kitchen, bath, store, home office, and home entertainment applications.
• Plumbing Products (33% of net sales): products include faucets, showerheads, and handheld showers and valves.
• Installation and Other Services (16% of net sales): sells installed building products and distributes building products primarily to the new home construction market, and to a lesser extent, the commercial construction market
• Decorative Architectural Products (22% of net sales): includes paints, primers, specialty paint products, stains, varnishes and waterproofing products.
• Other Specialty Products (8% of net sales): sells vinyl, fiberglass and aluminum windows and patio doors.

Business Growth

FY 2009 (ended December 31, 2009)^[1]

• Net sales fell 18% to $7.8 billion. The company attributes the decline to a 38% decrease in new home construction and overall less spending for home improvement products.
• The company reported a net loss of $140 million an improvement from the net loss of $366 million in the prior year.

Trends and Forces

• A slumping housing market means less demand for Masco's products: Because 40% of the company's revenues are related to new home sales the company is extremely vulnerable to swings in the housing market. Any indication that the housing market is not making a fast and full recovery is bad news for Masco's sales growth. A weak housing market means more foreclosures, which means that home construction declines. Masco's sales depend on new housing construction because it provides many home builders with the materials they need to build a home. A weak housing market and a slow economy also means that homeowners are less likely to spend money on home improvement projects. If a homeowner knows that his home is decreasing in value over time, he won't bother to repair it to increase its value until home prices start increasing. Additionally a weak US economy means that people are saving more rather than spending on discretionary goods or projects. As a result of the weak housing market, Masco's net sales fell by 18% in 2009.^[1]

Sales of older homes also influence the company's performance. As sellers seek to increase the sale price and new owners seek to improve their purchase. In a down market, however, owners typically hold off on major projects because of the decrease in equity in existing houses.

• Masco's sales rely heavily on large customers like Home Depot: Masco depends on several large customers for a significant portion of their revenue - for example, Masco's products account for less than 10% of Home Depot's sales, but Home Depot accounts for about 26% of Masco's revenues with purchases of $2.1 billion.^[3] Home Depot has been successful in pushing for price concessions from its vendors. Masco's Decorative Architectural Products segment, which sells Behr Premium Plus brand paint exclusively through Home Depot is especially vulnerable to Home Depot's pricing power.

• Some of Masco's larger customers are also purchasing less in favor of selling more of their own private label products. Private label products are sold under the brand name of a specific store - for example, Wal-Mart and Target sell products branded with their own name. Under this scenario, Masco is increasingly finding itself competing with its own customers.

• Raw material cost increases or shortages: Because Masco's products include materials like copper, brass and particle board, the company is sensitive to raw materials costs. Culprits include brass and copper for the plumbing segment, titanium dioxide and resins for the decorative architectural segment, and insulation for the installation segment.

Competitors

The home improvement and construction supply market is very fragmented, with many large and small players, and is subject to increasing global competition. Masco is the largest player in the construction services segment and the largest buyer of insulation material in the world. Some of the company’s most significant competitors are outlined below.

• American Standard Companies: Masco competes with American Standard in its Plumbing segment, as the competitor is a leading manufacturer of bathroom and kitchen fixtures.

• Berkshire Hathaway (BRK): Berkshire Hathaway primarily competes with Masco in the Decorative Architectural Products segment. The company owns Benjamin Moore & Co., which sells paints, stains and industrial coatings.

• Fortune Brands: Fortune Brands manufactures home and hardware products, and competes with Masco in its Cabinets and Plumbing segments. The company sells cabinetry under brand names including Aristokraft, Omega, Kitchen Craft and others. The company owns SBR, Inc., which is a company of brands that includes Simonton Windows, and the Moen brand of bath and kitchen products.

• Imperial Chemical Industries: ICI is a British chemical producer which makes coatings, adhesives, starch and synthetic polymers. Masco competes with ICI in the Decorative Architectural Products segment.

• PPG Industries: PPG manufactures coatings, glass and chemical products, and is a primary competitor in the Decorative Architectural Products segment.

• Sherwin Williams: Sherwin Williams also competes with Masco in its Decorative Architectural Products segment, as the company sells its own brand of coatings, finishes, and associated supplies through company-operated stores.

References

1. ↑ ^{1.0 1.1 1.2 1.3} MAS 2009 10-K "Selected Financial Data" pg. 16
2. ↑ MAS 2009 10-K "Business" pg. 3-6
3. ↑ MAS 2009 10-K "We rely on key customers and may encounter conflicts within an between our distribution channels" pg. 8-9