Is Masco an Outperform?

With shares of Masco Corporation (NYSE:MAS) trading at around $20.68, is MAS an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Masco experienced a nice gap-up yesterday thanks to strong earnings that beat expectations. Q4 adjusted EPS came in at $0.04 versus an expectation of -$0.01. Q4 revenue came in at $1.89 billion versus an expectation of $1.79 billion. Revenue was also up 8.6 year-over-year.

International sales declined 1 percent, but North American sales increased 12 percent. All five operating segments showed positive sales growth and improved profit. Gross profit margins increased to 25 percent from 21.1 percent. Operating profit margins increased to 5 percent from 1.6 percent. Plumbing Products net sales increased 10 percent. Decorative Architectural Products net sales increased 11 percent. North American Cabinetry sales increased 13 percent.

With all this positive news, it might seem as though we’re living in a fairytale-like dream. That’s a possibility, and we’ll cover that possibility in the Trends section. For now, let’s take a look at some important numbers prior to forming an opinion on the stock…

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Masco is downright awful, and it doesn’t seem to be improving.

Debt-To-Equity

Cash

Long-Term Debt

MAS

6.79

$1.40 Billion

$3.63 Billion

USG

2.74

$652.00 Million

$2.31 Billion

 

T = Technicals on the Stock Chart Are Strong   

Masco has gapped up and is continuing to climb higher. At the time of this writing, it’s up an additional 3.50 percent today. Masco has outperformed the S&P 500 over the past three years, but is has underperformed USG Corporation (NYSE:USG). At least Masco offers a 1.70 percent yield.

1 Month

Year-To-Date

1 Year

3 Year

MAS

15.77%

23.49%

58.04%

59.57%

USG

3.07%

7.59%

108.70%

128.60%

S&P 500

3.37%

6.76%

15.77%

50.51%

 

At $20.68, Masco is currently trading above all its averages.

50-Day SMA

17.14

100-Day SMA

16.32

200-Day SMA

14.88

 

E = Earnings Have Been Poor        

If you’re a bottom line type of investor, then you won’t be pleased with the numbers below.

2008

2009

2010

2011

2012

Revenue ($)in billions

9.48

7.66

7.49

7.47

7.75

Diluted EPS ($)

-1.13

-0.53

-3.00

-1.66

-0.33

 

When we look at the last quarter on a year-over-year basis, we see an improvement in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue ($)in billions

1.74

1.88

2.00

1.98

1.89

Diluted EPS ($)

-1.65

0.09

-0.22

0.04

-0.25

 

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

At the moment, trends definitely support the industry. The improving housing market has led to great results for Masco. This has mostly been due to low interest rates, which has attracted more buyers. It’s amazing to think that we were in this same situation not so long ago. The end result? Disaster. Interest rates will eventually go back up, and when they do, it’s not going to be a pretty economic environment. The only way the current economic environment can prove it’s for real is if it can survive as interest rates increase. This is highly unlikely, which is exactly why interest rates will remain low. In the long run, this is a dangerous industry. For now, take out your party hats, noisemakers, and kazoos.

Conclusion

Even if you believe in the current economic recovery, Masco isn’t a stellar option. Margins are weak, debt management is poor, and the forward P/E is 35.96.

This is a high-risk/high-reward trade that could pay off handsomely. It’s just hard to predict when this freight train will hit a brick wall.

All factors considered, Masco is a neutral WAIT AND SEE.

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