Mohawk (MHK): A Value Proposition?

I’m not sure there is any point in posting this on this, or any other, board given the frustration of Fools and the limited foot traffic it is likely to receive, but what the hell.

MOHAWK (MHK)

This is a hoursing and construction supply company specializing in flooring products such as laminate and carpet. It has about $12 bil in annual sales but will likely see sales slow as the Fed induced recession takes hold, especially in the housing market. This company is a steady eddy, growing revenues at around 6% a year over the past five and ten years. Last year they achieved peak EPS of $14.84 but can be expected to slip in the coming year or two if the recession happens. They are currently trading at around 6 times eps. According to VL they haven’t traded at this low a multiple in over a decade. Even if we use the ten year average eps of $10, the shares are still trading at 10 times normalized earnings. If they can growing earnings at 6% over the next decade from a normalized baseline of $10/sh we can expect them to earn $18/sh with a future price between $310-360 depending on the future multiple.

This is a solid company with manageable debt, a steady record of earning money even through the great recession, and it is selling at a historically low multiple. It seems like exactly the kind of company Warren Buffett would be looking to buy. Additionally, this market leading supply company is likely to benefit from the historic housing shortage we are experiencing in the USA even with a recession likely.

At $92/sh this looks like a classic value stock selling at a significant discount to its intrinsic value, which I put at $170 at a minimum. A simple reversion to median PE of 17 from a reduced earnings base of $10 gives you a nearly 100% gain. This seems like a rare no brainer to me. Of course, someone will counter with the doomsday scenario in which inflation reaches 100% and another house is never built as the second great depression sweeps the world, but baring the end of capitalism I like the value proposition.

PhoolishPhilip

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Hi Philip,

What happend in 2018? The stock went from $280ish all the way down to below $70. Then recovered to $220 only to fall back to where it is today.

That’s a lot of volatility which makes me think there’s more to the story. . . .

Rich

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They face a series of class action suits over fraudulent sales practices, and PFC pollution in Georgia.

The amended complaint alleges that the Company (1) engaged in fabricating revenues by attempting delivery to customers that were closed and recognizing these attempts as sales; (2) overproduced product to report higher operating margins and maintained significant inventory that was not salable; and (3) valued certain inventory improperly or improperly delivered inventory with knowledge that it was defective and customers would return it.

Lawsuit

Class Action Suit

The Company believes that adequate provisions for resolution of all contingencies, claims and pending litigation have been made for probable losses that are reasonably estimable. These contingencies are subject to significant uncertainties and the Company is unable to estimate the amount or range of loss, if any, in excess of amounts accrued. The Company does not believe that the ultimate outcome of these actions will have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations, cash flows or liquidity in a given quarter or year.

What else are they going to say? Baring a catastrophic ruling in either case, I suspect these suits will be manageable. The biggest red flag is the involvement of the US Government in one of the suits.

Government Subpoenas

As previously disclosed, on June 25, 2020, the Company received subpoenas issued by the U.S. Attorney’s Office for the Northern District of Georgia (the “USAO”) and the U.S. Securities and Exchange Commission (the “SEC”) relating to matters similar to the allegations of wrongdoing raised by the Securities Class Action. The Company’s Audit Committee, with the assistance of outside legal counsel, conducted a thorough internal investigation into these allegations. The Audit Committee has completed the investigation and concluded that the allegations of wrongdoing are without merit. The USAO and SEC investigations are ongoing, and the Company is cooperating fully with those authorities. The Company will continue to vigorously defend against the allegations of wrongdoing in the Securities Class Action and does not believe they have merit.

I think the current price discounts these risks and that MHK is worth a small allocation.

PhoolishPhilip

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Thanks, Philip,

FWI, I think you are probably correct in your conclusion.

Rich