What’s Next For Mohawk Industries’ Stock After A 45% Rise?

After a 45% rise since the March lows of this year, at the current price of around $85 per share (as of July 29th), we believe Mohawk Industries stock (NYSE: MHK) has reached its near term potential. The flooring products manufacturer has seen its stock underperform through the coronavirus crisis, dropping by almost 38% year-to-date (compared to flat growth in the S&P). This was largely due to softness in retail demand, unplanned shutdown costs, and reduced production volume.

Mohawk Industries’ stock is already about 69% lower than it was at the end of 2017, a little over 2 years ago. Our dashboard What Factors Drove 69% Decline In Mohawk Industries Stock Between 2017 And Now? has the underlying numbers.

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Although Mohawk Industries saw a 5% revenue growth during the 2017-2019 period, this growth was largely offset by a 27% decrease in profitability as net income margin declined from 10.2% in 2017 to 7.5% in 2019. This decline was mainly because of higher inflation and ramp-up costs, lower volumes, and marketing investments. On a per-share basis, adjusted earnings decreased from $13.61 in 2017 to $10.04 in 2019.

The stock price declined largely during this period due to lower margins. This fall led to a decline in P/E multiple from 21x in 2017 to 13x in 2019. The multiple declined further this year and currently stands at 8x, as the stock price dropped significantly during the pandemic. We believe the P/E multiple could likely hover around the current levels in the near term.

So how has Coronavirus impacted the stock?

Commercial real estate and construction tend to go hand in hand with the overall economic conditions which seem to be struggling due to the pandemic. As a result, there was a reduced demand for renovation, and in turn, the demand for carpet and flooring products took a large hit. Flooring is likely to be the most challenging segment in the near term due to its discretionary nature.

In Q1, Mohawk’s revenues declined 6% year-over-year (y-o-y) to $2.3 billion, with adjusted earnings falling 23% y-o-y. It’s Flooring North America segment sales declined 8% y-o-y, while Global Ceramic segment sales were down 6% y-o-y. The company’s operating income declined 8% y-o-y, due to lower volume, unfavorable price, and unplanned shutdown costs. Going forward, Mohawk expects to see a continued decline in operating income in Q2 as well, due to the impact of Covid-19. The consensus estimates a 20% decline in Q2 revenues. The company is scheduled to report its Q2 result on Friday, August 7th.

It should be noted that in addition to difficult financial liabilities, the company is a subject of a civil lawsuit. It has allegations that it engaged in fabricating revenues by attempting delivery to customers that were closed and recognizing these attempts as sales. In addition, there was an argument that stated that the company overproduced product to report higher operating margins and maintained inventory that was not stable. If proven, this could have serious implications for the company that could weigh on Mohawk’s shares in the long run.

Mohawk does not have any significant upside in the near-term, so looking for outsized outperformance? Here is a shortlist of 4 companies that beat the S&P 500, every single year, year after year, for the last 10 years

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