Construction Stocks

Mohawk Industries Inc. Analysis – October 2015 Update $MHK

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – September 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Mohawk Industries Inc. (MHK) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Mohawk Industries, Inc. is a flooring manufacturer that creates products for residential and commercial spaces around the world. The Company operates in three segments: the Carpet segment, the Ceramic segment, and the Laminate and Wood segment. The Carpet segment designs, manufactures, sources, distributes and markets its carpet and rug product lines in a range of colors, textures and patterns for residential and commercial applications. The Ceramic segment designs, manufactures, sources, distributes and markets a line of ceramic tile, porcelain tile and natural stone products. The Laminate and Wood segment designs, manufactures, sources, licenses, distributes and markets laminate and hardwood flooring. Its manufacturing and distribution processes provide carpet, rugs, ceramic tile, laminate, wood, stone and vinyl flooring. Its brands include American Olean, Bigelow, Daltile, Durkan, Karastan, Kerama Marazzi, Lees, Marazzi, Mohawk, Pergo, Quick-Step and Unilin.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of MHK – October 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $13,910,261,039 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.20 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -576.94% Fail
6. Moderate PEmg Ratio PEmg < 20 30.61 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.08 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.20 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.93 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

MHK value Chart October 2015

EPSmg $6.28
MG Growth Estimate 15.00%
MG Value $241.78
Opinion Fairly Valued
MG Value based on 3% Growth $91.06
MG Value based on 0% Growth $53.38
Market Implied Growth Rate 11.05%
Current Price $192.22
% of Intrinsic Value 79.50%

Mohawk Industries Inc. does not qualify for either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, lack of dividends, and the high PEmg and PB ratios.  The Enterprising Investor is concerned by the level of debt relative to the current assets and the lack of dividends.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time or proceed with a cautious speculative attitude.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from a loss of $0.62 in 2011 to an estimated gain of $6.28 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 11.05% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Mohawk Industries Inc. (MHK)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

MHK Charts October 2015

Net Current Asset Value (NCAV) -$26.42
Graham Number $107.86
PEmg 30.61
Current Ratio 1.20
PB Ratio 3.08
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

 

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Most Recent Balance Sheet Figures

Total Current Assets $3,608,622,000
Total Current Liabilities $3,001,531,000
Long-Term Debt $1,777,828,000
Total Assets $10,165,670,000
Intangible Assets $3,225,510,000
Total Liabilities $5,557,436,000
Shares Outstanding (Diluted Average) 73,756,000

Earnings Per Share History

Next Fiscal Year Estimate $8.20
Dec14 $7.25
Dec13 $4.82
Dec12 $3.61
Dec11 $2.52
Dec10 $2.65
Dec09 -$0.08
Dec08 -$21.32
Dec07 $10.37
Dec06 $6.70
Dec05 $5.72
Dec04 $5.49
Dec03 $4.62
Dec02 $4.39
Dec01 $3.55
Dec00 $3.00
Dec99 $2.61
Dec98 $1.89
Dec97 $1.32
Dec96 $0.95
Dec95 $0.13

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $6.28
Dec14 $4.94
Dec13 $3.42
Dec12 $0.97
Dec11 -$0.62
Dec10 -$1.57
Dec09 -$2.36
Dec08 -$1.87
Dec07 $7.43
Dec06 $5.77
Dec05 $5.12
Dec04 $4.61
Dec03 $3.99
Dec02 $3.48
Dec01 $2.85
Dec00 $2.31
Dec99 $1.77

Recommended Reading:

Other ModernGraham posts about the company

14 Companies in the Spotlight This Week – 1/25/14
Mohawk Industries (MHK) Annual Valuation

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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