Why Is This Industry Leader Lagging?

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I'm always looking for industry leaders that are under-performing their peers, and Masco (NYSE: MAS) appears to be just that. Even with the impressive rebound in housing starts over the past two years, Masco has managed to under-perform major peers. 

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Masco manufactures, sells and installs home-improvement and building products. Its sales avenues include mass merchandisers, hardware stores, home centers and home builders. 

While the company does operate primarily in North America, with nearly 80% of revenue derived form the segment in 2012, it does have an impressively diverse product portfolio; plumbing products account for around 38% of revenue, paints and stains are 23%, cabinets and related products are 16%, installation is 16%, which includes building products, installed gutters, fireplaces and garage doors. Windows and doors account for the final 7%. 

Masco has one of the top positions in cabinetry and faucets, with popular brands that include KraftMaid and Merillat cabinets, and Delta and Hansgrohe faucets. The company posted 1Q EPS results that were an 85% year-over-year improvement thanks to various turnaround and cost-saving initiatives.

Some of these initiatives include integrating its cabinet business into a single organization, streamlining its supply chain and making headcount reductions. This has helped the company to lower fixed costs by $600 million over the past five years by closing 33 facilities and reducing headcount by more than 30,000 employees. The company expects to save another $25 million 2013. 

Masco saw intense pressure due to the housing market slowdown, but the home-building products company appears to be gaining traction thanks to the rebounding housing market. 

The improvement in the home-building industry in North America should continue seeing positive growth thanks to low mortgage rates, not to mention an uptick in the remodeling market -- driven by increased consumer spending and higher employment. 

Major competitors 

A couple of Masco's key competitors are in the paint industry. Sherwin-WIlliams (NYSE: SHW) and Valspar (NYSE: VAL) manufacture and distributes a wide range of paints and coatings. 

Sales at Sherwin are expected to be up 13% in 2013, after a 8.8% increase in 2012, thanks to strength in the do-it-yourself market, where Sherwin will add a net 70 stores in 2013 and post mid single-digit same-store sales growth. 

Sherwin managed to post 1Q EPS of $1.11 compared to $0.95 for the same period last year. Revenue was up only 1.4%, but gross margins drove the EPS expansion thanks to higher sales prices and lowered material (input) costs. 

Big news of late for Sherwin was its acquisition of Mexico's Consorcio Comex. However, the paint company got a downgrade from Fitch Ratings due to the expected high leverage that Sherwin will have to take on to complete the $2.3 billion deal. Fitch cut Masco to A-minus, four steps above junk grade.

Valspar also managed to post year-over-year EPS growth last quarter; posting 2Q EPS of $0.91 on flat revenue performance compared to $0.84 for the same period last year. However, the U.S. housing recovery could mean less for Valspar, where the paint company is turning to international growth. Valspar already has the number-two decorative paint business in Australia and number three in China. 

As well, Valspar bet on the European paint market with an industrial paint company acquisition that will give it exposure across most of Europe. On the other side, Valspar closed a number of North American facilities to lower costs during the real estate crisis. The company closed four North American manufacturing plants in 2008 and two in 2009. Now the company hopes to renew its manufacturing capabilities in North America by partnering with Ace Hardware earlier this year. Valspar will manufacture and supply Ace-branded paint and sell various Valspar paints in more than 4,000 Ace retail locations in the U.S.

Hedge fund interest

Going into 2Q there were a total of 20 hedge fund long Masco, a 15% increase from the previous quarter. This includes Richard Pzena's Pzena Investment Management, which had the largest position, worth $236 million (check out Pzena's top picks).

Sherwin-Wiliams had the most interest among the three major peers, with 32 hedge funds long the stock at the end of 1Q, but this was a 16% decrease from the previous quarter. The top hedge fund owner was Select Equity with a $217 million position; that made up 2.9% of its 13F portfolio (see Select Equity's top stocks).

Meanwhile, Valspar had only 18 hedge funds long the stock. This includes Iridian Asset Management with the top position, worth some $227 million and making up 3.3% of its 13F portfolio (see Iridian Asset's newest picks).

Bottom line

Masco has under-performed some of its top peers and is now the cheapest in the industry on a price-to-sales basis. 

With a rebound in the housing industry as a tailwind for the company, Masco is a solid investment opportunity. It appears that other major peers Sherwin-Williams and Valspar have enjoyed too much of a run-up in their stock prices and are trading on the expensive side. What's more is that unlike Sherwin-Williams and Valspar, Masco is so much more than just a paint company, where paint makes up only 23% of revenue. 

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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