In early November, I wrote that Mohawk (the leading carpet and tile manufacturer) had more pain to come… and the stock, though down some 55%, was not reflecting this yet.
Fast forward a bit following that article, and MHK went down another ~10% post-article, but now is up 8%. So what happened? Did something encouraging come from its latest earnings report?
Well, do you call a 20% year-over-year decline in EBITDA good?
I didn’t either. The company called out similar factors as it did in the last call. “The period was affected by significant inflation, slowing markets and LVT impacting sales of other products.”
Unfortunately, I don’t these headwinds are abating any time soon. As I noted in my last post, MHK has gotten a massive margin uplift from a decline in raw materials. That’s starting to normalize.
Here’s the trend on LTM EBITDA margins over time.
Contrarian investors might say, “well, what if it snaps back? Then the stock is cheap”. That may be true, but I doubt it. The street is currently expecting 17% EBITDA margins for next year and 18.5% the following year. So essentially they are expecting a snap back. As such, I think the company is trading more at around 8.0x+ 2020 EBITDA, instead of 7.3x it would suggest.
Are the forgetting before the commodity collapse, Mohawk had ~13-14% EBITDA margins??
I think the stock is still too expensive considering these expected headwinds. More importantly, I think sentiment has room to fall, which we all know can be a larger driver of stock performance.