Mohawk Industries (MHK)

This one recently popped up on my VL screen and it looks like a winner. MHK is a flooring and carpeting manufacturer that looks to benefit from the housing shortage in the US right now. In the past decade it has grown revenue almost 7% a year while growing net income over 14% per year, This is the result of doubling net margins between 2012 and 2021 from 4.5% to 9.2%. On the downside, the business is cyclical with earnings growth slowing significantly over the past five years. EPS have ranged from a cyclical low of $3.78 to a high of $14.84, with an average of around $10/sh over the past decade.

The balance sheet looks strong with debt to equity falling from 36% in 2012 to 20% in 2021. Shares are trading at a PE of under 9, and at 12-13 times the ten year average earnings. The shares rarely trade under a PE of 10, so the current entry price looks attractive. VL projects EPS of $20/sh out to 25-27. At a future PE of 18 this would give a target price of around $360 with an expected annual return of 24% in five years.

Clearly the market is worrying about a recession crimping the housing market and slamming companies like Mohawk (you could say the same fears have hit RH as well), but I think the current price offers are good margin of safety for Mohawk if you are willing to hold for the long term.

PP

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Clearly the market is worrying about a recession crimping the housing market and slamming companies like Mohawk…

One other consideration is that most carpet is synthetic. Synthetic carpet is, in essence, solidified oil.
An observation from a few years ago by Mr Buffett about their Shaw Industries carpet division.

Oil is becoming expensive.
So perhaps some of the current market worry about Mohawk may be about their cost basis.
If the outlook for short term margins is poor, the market will take a dislike to you.

Jim

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One other consideration is that most carpet is synthetic. Synthetic carpet is, in essence, solidified oil.
An observation from a few years ago by Mr Buffett about their Shaw Industries carpet division.

Oil is becoming expensive.
So perhaps some of the current market worry about Mohawk may be about their cost basis.
If the outlook for short term margins is poor, the market will take a dislike to you.

Obviously, short term worries have spooked the market. Oil prices are spiking again, but I’m not sure we’re seeing a permanent rise in the cost of oil.

https://www.macrotrends.net/1369/crude-oil-price-history-cha…

There are a lot of names in the home and office furnishing sector that are getting beat up right now, including Ethan Allen and other furniture manufacturers, so I’m not sure oil is what is spooking investors. More likely it is fears of a recession.

It’s always good to think about why a company is getting beat up by Mr. Market because sometimes he is right about dumping a company, but nothing I see in Mohawk looks like a permanent impairment. Certainly, though, it could go much lower if the recession fears pan out. That’s why I tend to keep my weightings in each position quite low (1-2%) and aim to hold for 3-5 years. I’ve taken small positions in Ethan Allen, Kimball, and American Woodmark as well during the recent route of this sector.

PP

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