Mohawk posts another ugly quarter… still not cheap enough yet… $MHK

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.

MHK Margins_dec2018

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??

MHK 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.

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