Buy Masco (NYSE: MAS) Stock and April Calls on Remodel Strength
Buy Masco Corp (NYSE: MAS)
Buy Up To:$34
Options Trade: Buy to open the April 18, 2019 call on Masco Corp (NYSE: MAS) with a strike price of $33 at $1.35 or lower. Symbol (MAS190418C33)
*Due to volatility, you might consider dollar cost averaging your purchase (of both stock and options) over a longer period of time. The stock also tends to trade in tandem with the homebuilders, which may see another leg of bad news due to weak demand. I expect it would recover from any of this weakness but the risk remains.
Masco, a supplier of high-end cabinetry, paint and light fixtures, is selling at an all-time low valuation. New home sales dropped in the latter part of the year, dragging down the homebuilder stocks and any others tied in any way to home construction. This wholesale selling offers some great buying opportunities.
Masco is less correlated to new home sales and construction than you might think. In addition, it is only slightly exposed to foreign demand, particularly Asia, where the economy is softening.
84% of revenue is derived from re-models versus new builds. This helps insulate the company from a cyclical drop in new unit construction. Remodels tend to hold strong when homeowners stay put versus upgrading to a new home.
79% of revenue is derived from North America, protecting the company against weak European demand due to Brexit uncertainty and slower economic growth in Asia.
The fundamentals are solid on this long-term hold. The purchase of lower margin lighting company Kichler in March 2018 pulled down margins slightly but should stabilize as the company circles around that acquisition.
Cash flow is improving and demand from its largest customer, Home Depot, looks secure.
Over the past 10 years, Masco’s average price to earnings multiple has been in the mid to high-teens versus a current level of 11 times 2019 estimates (earnings are expected to grow 13% in 2019). I expect the stock to move higher as both the multiple moves higher and as investors begin to digest and even higher earnings growth rate in 2020.
Masco will report its fourth-quarter earnings on or about February 7.