Mohawk Shares Off $4.60 Friday

New York, NY, April 3, 2006--Shares of Mohawk Industries Inc. fell $4.60 to $80.72 Friday after the company lowered its first-quarter earnings view because of rising raw material costs. For the first quarter, the Calhoun, Ga., company lowered its earnings estimate to the range of $1.03 to $1.05 a share from its February guidance of $1.17 to $1.26. "Management indicated this was a major surprise," Avondale Partners analyst Barbara Allen said, "as raw materials and energy costs should of stabilized." The greatest impact on first-quarter earnings were $13 million to $15 million in LIFO accounting charges, or Last In, First Out, which ties the cost of goods sold to the cost of the most recent purchases. That's in the range of 13 cents to 15 cents a share, Allen estimates. If the cost of raw materials had stabilized, then the LIFO charges would have diminished, she said. Allen lowered her rating on the stock to market perform from market outperform, which she set in February after Mohawk announced its previous guidance. "Our upgrade on the shares had been predicated on a resumption of earnings growth, driven by the hard surface products," Allen said in a research note. "With further deterioration in the sizable Mohawk carpet segment, however, earnings growth seems unlikely until the second half, at best." Mohawk shares recently traded at $81.78, down $3.54, or 4.1%, on volume of 609,100. Average daily volume is 417,806 shares. "The real problem isn't LIFO, it's sky-rocketing oil prices," according to Morgan Keegan analyst Laura Champine. "High raw material costs hits a company like Mohawk immediately, there is no lag." All of Mohawk's carpets are derived from oil, so a LIFO increase was expected, but today's view reveals the impact on earnings were more than anticipated, she said. Champine, maintained a buy rating on the stock, citing strong fundamentals and its growing flooring business. Neither Champine nor her firm own or have any investment relationship with Mohawk. Costs have stabilized, according to UBS analyst Margaret Whelan, but inflation over the last year has nonetheless cut into sales and margins, resulting in higher LIFO accounting charges. Whelan, who doesn't own any Mohawk shares, also maintained a buy rating on the company. "Given the maturation in its core business, we favorably view management's efforts to expand into faster growing and higher margin segments, such as hard surfaces," Whelan said in a research note. "In the future (we) believe these segments should help offset lower carpet margins." UBS does make a market in Mohawk's securities.