You may have never heard of Masco (MAS), but I am sure you have heard of its brands such as Delta faucets or Behr paint and seen its other brands such as Milgard windows, Brizo and Hansgrohe plumbing products as you walked the aisles of your local Home Depot (HD). Masco is among the largest US manufacturers of home improvement and building products. Approximately 28% of 2013 sales are from Home Depot, with 81% of total sales generated within the US and the rest primarily in Europe.

Masco operate under five business segments:

1. Cabinets and Related Products (12% of 2013 Revenue) — Brands include KRAFTMAID®, MERILLAT®, MOORES™ and QUALITY CABINETS™
2. Plumbing Products (39% of 2013 Revenue) — Brands include s DELTA, PEERLESS, HANSGROHE, AXOR, BRIZO, BRASSTECH, BRISTAN, GINGER, NEWPORT BRASS and PLUMB SHOP
3. Installation and Other Services (17% of 2013 Revenue) — Includes insulation, insulation accessories, gutters and roofing, among other products primarily sold to contractors and dealers from Masco distribution centers
4. Decorative Architectural Products (24% of 2013 Revenue) — Includes architectural coatings including paints, primers, specialty paint products, stains and waterproofing products under the brand names BEHR® and KILZ® and LIBERTY® and BRAINERD® branded cabinet, door and window hardware
5. Other Specialty Products (8% of 2013 Revenue) — Includes the manufacture of vinyl, fiberglass and aluminum windows and patio doors under several name brands

Masco has been working on the execution of four strategic initiatives:

1. Extent and expand the Masco portfolio of brands
2. Improve operating performance by reducing costs (primarily through savings within its supply chain) and implementing production process improvements
3. Improve underperforming businesses through the fixed cost reductions
4. Strengthen the balance sheet through net debt reduction

As would be expected, Masco’s sales are very reliant on the growth within the housing sector including new home constructions, remodeling and housing starts.

MAS – Earning Summary

In February, Masco reported in its fourth quarter 2013 results that sales increased 9% in the quarter to $2 billion with all segments contributing to top-line growth. Earnings also saw improvement with earnings per share improving to $0.11, from a loss of $0.20 in the same period the previous year.

Masco continued to see growth in the first quarter of 2014, reporting sales increased 5% to $2 billion, up from $1.9 billion in the same period last year. Earnings per share saw improvement up from $0.15 in the same period last year to $0.21 for the quarter. Masco’s second quarter results continued the sales momentum with sales increasing 5% to $2.26 billion and earnings per share of $0.39 compared to $0.22 in the same period the previous year.

Masco to Spin-Off Installation Business

Increasing sales and earnings is not driving Masco’s stock price higher this year with year to date returns of about negative 8%. Masco’s stock saw a mid-year rally on rumors that Masco may spin off or sell some of its well-known brands. This rumor turned into reality at the end of September when Masco announced the 100% spin-off of its Installation and Other Services business, announced plans to buy back 50 million more shares (14% of total outstanding) and the reduction of 40% of its headquarters staff. The news prompted some Analysts to change their ratings upwards, but unfortunately did not help Masco’s stock price, down over 10% from the beginning of October.

Masco has an analyst 12-month consensus price target of $26 per share and a price to earnings ratio of 20.9 compared to an industry average of 40. Management is actively looking to restructure the business and streamline operations, which should help earnings well into next year. Masco’s debt to equity ratio remains elevated from historical levels at 4.26, but liquidity remains good with a current ratio of 1.54.

There is a lot of room for housing related growth, but America’s shift to more multi-family living and frugality caused by the great recession may dampen Masco’s future earnings. Although I expect the economy to continue its modest growth into next year, I don’t see housing taking off again anytime soon as regulatory pressure and continued litigation related to the mortgage market will hurt consumers ability to buy new houses and remodel existing ones. If Masco can continue to focus on profitability and getting its debt under better control, this stock may be worth revisiting as certainty over the housing market becomes more evident.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.