Masco Corporation (MAS)

[Enterprising Investor]

Investors Hope Masco Goes to Pieces (6/17/14)

Shares Surged After CEO's Comments

Masco Corp., maker of some of the best-known products in the home-improvement and home-construction business, is suddenly in favor on Wall Street. The reason: speculation that the company will spin off or sell some of its top brands.

Masco is one of the largest vendors to Home Depot Inc. and Lowe's Cos., which sell hundreds of the company's products including Delta faucets, KraftMaid cabinets, Behr paints and Milgard windows and doors. The company also sells to home builders and installs its products in homes under construction.

But at an investor conference last month, Masco's new chief executive, Keith Allman, hinted that the company might have too many brands and divisions. He said he is reviewing Masco's multiple business lines and considering strategies to boost Masco's value.

The comments set off a rally that boosted Masco's common stock 11.5% in the past month, before a slight pullback in the past week. It closed Tuesday at $21.72, down 0.3% on the New York Stock Exchange but still near its 52-week high of $23.63 set in March.

In an interview this week, Mr. Allman said he hasn't yet made any major decisions about Masco's many businesses but indicated that big changes are ahead for the 85-year-old company.

"I view myself as a transformational leader," said Mr. Allman, who joined Masco in 1998 and oversaw its plumbing and North American cabinet divisions before his promotion to CEO in January. "That's how the board views me, and that's why they appointed me. I'm not a status-quo guy." He said possible changes could include divestitures, acquisitions, internal integrations or stock buybacks.

Many Wall Street analysts predict that Masco, based in Taylor, Mich., will make a move next year at the earliest, perhaps by divesting its cabinet-manufacturing division or the installation-services division that caters to home builders. Both divisions posted operating losses in the first quarter. Cabinets are losing sales due to increased competition while the installation business remains challenged even after significant cost-cutting, analysts say.

What Masco needs most, several analysts say, is a further improvement in the home-construction market to soak up excess capacity in its manufacturing plants. The company ramped up its capacity drastically in recent decades through acquisitions. Since the downturn, it has cut $600 million of fixed costs, closing 39 plants. But analysts say it still needs more production volume to help its businesses reach consistent profitability.

"It's kind of like having a Porsche engine in a VW frame," said Robert Wetenhall, an analyst with RBC Capital Markets. "The company is built to operate in a much more robust housing market. This would be a much more profitable company at 1.4 million housing starts [annually in the U.S.], but we'll be lucky to do 1 million this year."

Adding to the challenges at Masco, activist investor Daniel Loeb's Third Point LLC recently disclosed in a securities filing that it took a 1.3% stake in the company in the first quarter. A spokeswoman for Third Point, which bought 4.75 million Masco shares last quarter, declined to comment about Masco this week. Mr. Allman said he has spoken with Third Point, as he has with other investors, but he declined to elaborate.

Some analysts theorize that if Masco spun off some of its laggard divisions, its stronger units like plumbing and paint likely would get higher valuations from investors, they say.

Nishu Sood, a Deutsche Bank Securities analyst, estimates that breaking up Masco would yield value of roughly $27 a share, a 24% premium to Tuesday's closing price. "Our analysis showed that, in a portfolio as large as Masco's, there is some value that could be unlocked by taking some dramatic actions, like spinoffs or sales, and improving some of the businesses where margins have lagged its peers," Mr. Sood said.

Masco's origins date back to 1929, when Alex Manoogian started machining parts for the auto industry. In 1954, the company branched out into making single-handle faucets under the Delta brand. Masco expanded into cabinets in 1985 and into paint, windows and services in the 1990s.

The company's revenue swelled to more than $12.7 billion in 2006, then plummeted during the housing downturn, which left Masco with too much manufacturing capacity. The company posted losses from 2008 to 2012. Last year, things started to turn around and Masco reported net income of $272 million on revenue of $8.2 billion.

—David Benoit contributed to this article.

Write to Kris Hudson at [e-mail]

http://online.wsj.com/articles/masco-shares-rally-on-signs-of-a-break-up-1403049130