Building Product Firms Reevaluating 1st Quarter

Philadelphia, PA, Apr. 4--Economic uncertainty, worries over war in Iraq, and February weather may dampen the first quarter performance of the nation's building product suppliers. Earnings warnings last month from Sherwin-Williams Co. and Mohawk Industries Inc., as well as recent guidance from power tool maker Black & Decker Corp., are an indication. Mohawk cited geopolitical events, harsh winter weather and the resulting weakened demand when it cut its first quarter earnings estimate roughly two weeks ago. The company also noted rising raw material costs and announced a price increase in carpets. Mohawk projected earnings of $0.60 to $0.63 a share for the first quarter, far below analysts' expectations at that time and below a previous company estimate. The company, which earned $0.77 a share in the first quarter of 2002, said it expected improvements in sales and operating margins in the second half of this year. The consensus estimate of analysts surveyed by Thomson First Call pegs first quarter earnings at $0.61 a share. Early in March, Sherwin-Williams said it expects first quarter sales to be flat or slightly higher year-over-year, versus a previous outlook of 2.5% to 4.5% growth, and lowered its earnings outlook to $0.20 to $0.23 a share from a previous range of $0.24 to $0.27 a share. The company earned $0.23 a share in the same period a year ago, excluding an asset impairment charge. Analysts surveyed by First Call expect the company to earn $0.22 a share in the latest quarter. On Wednesday, Black & Decker said its first quarter earnings should meet or exceed the consensus forecast of $0.43 a share, versus $0.41 a share in the same quarter a year ago, thanks to a restructuring program that is improving operating margins. The company, however, cited a weak economy in saying sales would fall short of expectations. “Weather and war fears have really taken a bite out of these types of companies,” SunTrust Robinson Humphrey analyst Keith Hughes said. Macroeconomic forces affecting Mohawk could extend to other building products companies, including Masco Corp., he said. Hughes expects Masco, which makes Delta faucets and KraftMaid cabinets, to earn $0.31 a share in the first quarter, the estimate produced by the Thomson First Call analyst consensus survey and the same amount the company earned in the comparable period in 2002. Hughes sees positive factors working in both Mohawk's and Masco's favor. In Mohawk's case, Hughes said, the carpet industry "is one of the few areas of this universe that has some kind of pricing power," as the industry is consolidated in two big players and the retailers are mostly small flooring dealers. Masco benefits from selling some items for which demand is relatively steady, he said. And home builders account for 40% of Masco's business, Hughes noted. While there's some dispute over the trend of home building demand Hughes said, "I think it's going to register a very good first quarter, so it will help their numbers out." Hughes rates Mohawk stock at outperform and Masco stock at equal weight. He doesn't own shares of either company. SunTrust Robinson Humphrey has no investment banking relationship with Masco, but managed or co-managed a securities offering for Mohawk in the last 12 months, the analyst said. "Obviously the war's likely to have an impact on demand for home improvement products. How deep that impact is going to be we're not sure," Banc of America Securities analyst Carl Reichardt Jr. said.

Related Topics:Mohawk Industries, Lumber Liquidators

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