Stocks

Mohawk Industries (MHK) Annual Valuation

moneyCompany Profile (obtained from Google Finance): Mohawk Industries, Inc. (Mohawk) is a producer of floor covering products for residential and commercial applications in the United States and residential applications in Europe. The Company is a carpet and rug manufacturer and manufacturers, marketers and distributors of ceramic tile, natural stone and hardwood flooring in the United States, as well as a producer of laminate flooring in the United States and Europe. The Company has three reporting segments: the Mohawk segment, the Dal-Tile segment and the Unilin segment. The Company has recently expanded its international presence through investments in Australia, Brazil, China, France, Mexico and Russia. In January 2013, the Company acquired Pergo. In April 2013, it completed the acquisition of the Marazzi Group. In May 2013, the Company acquired Spano Group.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $137.24
MG Opinion Fairly Valued
Value Based on 3% Growth $51.69
Value Based on 0% Growth $30.30
Market Implied Growth Rate 16.34%
Net Current Asset Value (NCAV) -$14.48
PEmg 41.17
Current Ratio 2.30
PB Ratio 2.46

Balance Sheet – 9/30/2013 

Current Assets $3,188,500,000
Current Liabilities $1,385,200,000
Total Debt $2,257,400,000
Total Assets $8,564,200,000
Intangible Assets $2,525,000,000
Total Liabilities $4,239,700,000
Outstanding Shares 72,620,000

Earnings Per Share

2013 (estimate) $5.23
2012 $3.61
2011 $2.52
2010 $2.70
2009 -$0.08
2008 -$21.32
2007 $10.32
2006 $6.70
2005 $5.30
2004 $5.46
2003 $4.62

Earnings Per Share – ModernGraham 

2013 (estimate) $3.56
2012 $0.98
2011 -$0.61
2010 -$1.56
2009 -$2.40
2008 -$1.94

Conclusion:

Mohawk Industries has seen some rapid growth over the last few years, but it does not qualify for either the Defensive Investor or the Enterprising Investor.  The company’s earnings have lacked stability over the last 5-10 years, it does not pay a dividend, and it is trading at a high PEmg ratio.  As a result, value investors seeking to follow Benjamin Graham’s methods should review other opportunities, while keeping in mind the 7 Key Tips to Value Investing.  As for a valuation, the company has achieved a substantial level of growth over the last 5 years, having risen EPSmg (normalized earnings) from -$2.40 in 2009 to an estimated $3.56 for 2013.  This level of growth provides some support to the market’s implied estimate for growth of 16.34%, and the company therefore appears to be fairly valued at the present time.

What do you think?  What value would you put on Mohawk Industries (MHK)?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Mohawk Industries (MHK) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill

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