2023-11-01 17:06:48 ET
Summary
- Masonite International Corporation is facing tough conditions in the housing market, resulting in stagnant stock trading in 2023.
- The company is resorting to price hikes and acquisitions to maintain revenue and earnings, but this comes with added debt.
- Masonite is the largest U.S. door manufacturer and relies heavily on the North American market, with potential for long-term growth in housing starts and remodeling.
Shares of Masonite International Corporation ( DOOR ) have been trading stagnant in 2023, as the company is facing tough conditions in the housing market. To offset the organic revenue and volume declines, Masonite is resorting to price hikes as well as some acquisitions to maintain its revenue and earnings numbers.
This goes a long way in preserving revenues and earnings, but comes at the expense of added debt which will make the deals sound if growth returns, but could push up leverage ratios a bit as well if the housing market corrects (further).
Help People Walk Through Walls
The header of this paragraph is the mission of Masonite. The firm is a near $3 billion business which produced and sold 31 million doors in 2022. A total headcount of 10,000 workers enables pure play and vertically-integrated operations, which because of this integration is able to post EBITDA margins in the mid-teens.
The company is largely reliant on its North American markets, with both European and architectural activities being relatively small, as the exposure to the housing market is split pretty evenly between new construction, as well as renovation and remodeling activities.
The company claims to be the largest U.S. door manufacturer, and it is positioned to enjoy long-term growth from the fact that U.S. housing has started to lag compared to long-term averages, while the repair and remodeling market has been quite good in recent years (certainly during the pandemic).
While a door seems like a commodity, Masonite believes that the role of doors is getting more important. Insulation is key for safety and energy efficiency reasons, while safety concerns and smart home features play a more important role as well.
While many consumers associate doors with wood, the company offers a wide range of doors. About half of sales are made up of wooden doors, complemented by doors made out of chemical composites, steel, as well as glass, and other materials.
Shedding Some Perspective
Masonite was a $50-$70 stock for most of the 2010s, and after an initial knee-jerk reaction lower during the start of the pandemic, shares hit the $100 mark later that year as shares peaked at $130 in May 2021.
This was followed by some stagnation in 2022 as shares fell all the way back to the $70 mark by the autumn, only to recover towards the $100 mark as of this summer, to now see another correction towards the $80 mark. Over the past decade, the company has grown sales by a little over 50%, while it has gradually expanded margins, and furthermore managed to buy back some shares as well.
Towards the end of last year, Masonite announced a $375 million deal for Endura Products, a producer of high-performance door frames and system components, set to contribute $270 million in annual sales. That deal closed at the start of 2023, as Masonite posted its 2022 results in February this year.
Masonite reported an 11% increase in 2022 sales to $2.89 billion on which the firm posted GAAP earnings of $214 million, equal to $9.41 per share, while EBITDA was reported at $446 million. Net debt was posted at $569 million, but this was ahead of the Endura deal which would increase net debt a long way towards the billion mark.
Amidst higher interest rates hurting the housing market, Masonite guided for sales to come in flat at best in 2023, or fall by 5% otherwise. This was despite the contribution of Endura, as sales otherwise were seen down by 7-12%. Adjusted EBITDA was seen down slightly to $430 million, with earnings power seen at $7.75 per share, plus or minus fifty cents.
2023 - So Far
In May, Masonite posted flattish first quarter sales at $726 million, as adjusted EBITDA actually fell 15% to $106 million, while net debt fell to $904 million, coming in a bit below the pro forma leverage calculation upon the Endura closing date.
In August, Masonite posted a 3% fall in second quarter sales to $742 million as adjusted EBITDA came in dead flat at $118 million, all while net debt fell below the $800 million mark already, as volumes were down and prices were up. With the company still seeing earning power close to $8 per share, the resulting valuation multiples are non-demanding with shares down to $80 per share, at a 10 times earnings multiple.
The 22.3 million shares grant the business a near $1.8 billion equity valuation at $80, a number which rises to $2.6 billion if we factor in net debt, valuing the entire firm at around 1 times sales, in fact just below that.
Another Deal
In generally a tougher market, with interest rates hovering near their highs, Masonite sees tough market conditions, and in this tough market the company continues to (largely) hold onto its earnings power, trading at a mere 10 times earnings, while leverage comes in around 2 times.
Amidst this backdrop, Masonite announced its next deal with the purchase of Fleetwood Aluminum Products, acquiring a premium manufacturer of innovative glass door systems. These solutions are designed for luxury homes, with products made by its 350 workers in Corona, California.
The $285 million cash deal tag falls to $255 million if we factor in tax benefits related to the deal. With a $150 million revenue contribution in 2024, the price tag comes in quite a bit higher than the 1 times sales multiple at which Masonite trades itself. That said, Masonite believes that the EBITDA contribution for 2024 might come in at $36 million, for margins around 24% of sales, which is far higher than Masonite itself reports, making the premium sales multiple justifiable.
And Now?
Pro forma net debt will jump to about $1.07 billion here, as I think that leverage ratios will increase towards 2.5 times, likely a touch lower, which is still reasonable.
Given the uncertainty in the housing market, Masonite International Corporation's leverage is a bit high for my taste, certainly if margins take a beating, but the overall appeal is seen. Trading at just 10 times earnings, at a tougher (but arguably not the worst potential point) in the cycle, valuation multiples are not too demanding as the company has a solid strategy, as it appears.
Given all this, I am cautiously upbeat here, recognizing that Masonite has long traded at non-demanding valuations. However, given the leverage incurred, I would require a little greater margin of safety or better said a nice entry opportunity in the seventies.
For further details see:
Masonite International: Slowly Opening The Door