(MAS-NYSE) SUMMARY. Risk Level *

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1 February 10, 2015 Masco Corporation Current Recommendation Prior Recommendation Underperform Date of Last Change 02/23/2012 Current Price (02/09/15) $26.21 Target Price $28.00 NEUTRAL (MAS-NYSE) SUMMARY Masco s adjusted earnings of $0.24 per share in the fourth quarter of 2014 beat the Zacks Consensus Estimate by 20%. Earnings increased 60% year over year driven by improved revenues and strong margins. Though net sales of $2.06 billion missed the Zacks Consensus Estimate by 1.4%, it grew 3% year over year on the back of strong sales growth in Plumbing, Decorative Architectural Products, Other Specialty and Installation segments, partially offset by weakness in Cabinets. Overall, we are encouraged that, with an improving U.S. economy Masco continue to witness growing demand for repair and remodeling and new home construction products. However, performance at Cabinet segment is expected to continue to remain soft in the upcoming period due to lower demand and ERPrelated disruptions. We, therefore, maintain our Neutral recommendation on the stock. SUMMARY DATA 52-Week High $ Week Low $19.54 One-Year Return (%) Beta 1.91 Average Daily Volume (sh) 4,370,932 Shares Outstanding (mil) 356 Market Capitalization ($mil) $9,331 Short Interest Ratio (days) 2.88 Institutional Ownership (%) 87 Insider Ownership (%) 4 Annual Cash Dividend $0.36 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 1.6 Earnings Per Share (%) 48.7 Dividend (%) 2.8 using TTM EPS 25.7 using 2015 Estimate 21.0 using 2016 Estimate 16.9 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Below Average Type of Stock Large-Growth Industry Bldg&Const-Misc Zacks Industry Rank * 161 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,876 A 2,149 A 2,150 A 1,998 A 8,173 A ,965 A 2,260 A 2,232 A 2,064 A 8,521 A ,063 E 2,381 E 2,209 E 2,205 E 8,858 E ,024 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.13 A $0.23 A $0.27 A $0.15 A $0.77 A 2014 $0.15 A $0.32 A $0.31 A $0.24 A $1.02 A 2015 $0.22 E $0.38 E $0.37 E $0.28 E $1.25 E 2016 $1.55 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 RECENT NEWS Masco Corp Beats on Fourth Quarter Earnings, Lags on Sales Feb 09, 2015 Masco s adjusted earnings of $0.24 per share in the fourth quarter of 2014 beat the Zacks Consensus Estimate of $0.20 by 20%. Adjusted earnings increased 60% year over year driven by improved revenues and strong margins. Masco s net sales of $2.06 billion missed the Zacks Consensus Estimate of $2.09 billion by 1.4%. Revenues, however, grew 3% year over year on the back of strong sales growth in Plumbing, Decorative Architectural Products, Other Specialty and Installation segments. This was offset by weakness in Cabinets. Organic revenues increased 5% year over year. North American sales increased 4% year over year to $1.68 billion driven by growing demand for repair and remodeling and new home construction products with an improving U.S. economy. International sales declined 2% (up 6% in local currency) to $389 million. As regards repair and re-modeling activity, management is seeing steady growth in small ticket repair, mainly in the plumbing and window businesses. With regards to bigger ticket repairs, management is witnessing good volume in wholesale channels. Strong Margins Adjusted gross profit grew 5.6% to $571 million. Adjusted gross margin improved 60 basis points (bps) to 27.7%. Adjusted operating profit was $202 million, up 32% from the prior-year quarter. Adjusted operating margin increased 210 bps year over year to 9.8%, driven by increased operating leverage and solid cost controls. Operating margin increased 170 bps in North America to 10.6%. Operating margin increased 150 bps in the international markets to 11.6%. Segmental Analysis Cabinets and Related Products: Segment revenues were $243 million, down 3% year over year owing to challenges in retail and dealer channels. Operating loss of $7 million compared unfavorably with operating loss of $4 million in the prior-year quarter due to inefficiencies and costs associated with ERP implementation. After suffering in 2012, the company saw improving demand for cabinets in repair-remodel and new construction channels in However, the segment once again weakened in 2014 due to lack of big-ticket repair activity and ERP-related disruption. Plumbing Products: The segment recorded revenues of $804 million, up 1% year over year, driven by growth in the wholesale channels and across the segment. Organic revenues increased 5%. Adjusted operating margin of 14.4% improved 230 bps year over year, driven by strength in wholesale/ trade channel and profitability improving initiatives. Installation and Other Services: Installation and Other Services segment revenues amounted to $398 million, up 7% year over year, driven by consistent growth in new homes construction and commercial channels. Equity Research MAS Page 2

3 Adjusted operating margin of 6.5% was up 250 bps year over year driven by strong operating leverage and profit improvement initiatives. Decorative Architectural Products: Decorative Architectural Products segment revenues of $438 million were up 7% on the back of new products and successful programs across business. Sales were also driven by Behr Marquee and Behr Pro. Adjusted operating margin increased 210 bps to 18.3%, driven by continued share gains of builders hardware. Other Specialty Products: Other Specialty Products segment revenues were $181 million, up 8% year over year, driven by a strong repair and remodeling environment and continued momentum in the international window business. Segment adjusted operating margin was 4.4%, down 100 bps. Fiscal 2014 Masco s adjusted earnings of $1.02 per share in 2014 beat the Zacks Consensus Estimate of $0.98 by 4%. Adjusted earnings increased 32.5% year over year driven by improved revenues and strong margins. Masco s net sales of $8.52 billion missed the Zacks Consensus Estimate of $8.55 billion by 0.4%. Revenues, however, grew 4% year over year. Equity Research MAS Page 3

4 VALUATION Masco Corporation s current trailing 12-month earnings multiple is 25.7x, a 23.7% discount to the industry average of 33.7x. Based on 2015 earnings estimate of $1.25, Masco is trading at an earnings multiple of 21.0x representing a discount of 0.5% to the industry average of 21.1x. At the end of the fourth quarter of 2014, the P/B multiple of the stock was approximately 8.2x, a 36.7% premium to the industry average of 6.0x. Overall, the stock is attractive given a trailing 12-month ROE of 34.1% which is higher than 32.5% return from the industry. Our target price of $28.00 is based on approximately 22.4x of our 2015 earnings estimate. On a P/B basis, the price target is based on a P/B multiple of approximately 8.8x. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Masco Corporation (MAS) N/A 23.4 Industry Average N/A 18.1 S&P Lafarge S.A. (LFRGY) United Rentals, Inc. (URI) N/A 10.3 Owens Corning (OC) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Masco Corporation (MAS) Industry Average S&P Equity Research MAS Page 4

5 Earnings Surprise and Estimate Revision History Equity Research MAS Page 5

6 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of MAS. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform %, Neutral %, Underperform 7.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. NOTE YET. THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED OVERVIEW Headquartered in Taylor, MI, Masco Corporation (MAS) manufactures, sells and installs home improvement and building products. These products are sold through mass merchandisers, hardware stores, home centers, homebuilders, distributors and other outlets for consumers and contractors, and direct to consumers. Approximately 80% of the company s sales are generated from operations in North America, primarily in the U.S. Around 20% of the company s sales are generated outside the U.S., mainly in Europe. The company s largest customer is The Home Depot Inc. Masco operates through five business segments: Plumbing Products, Cabinets and Related Products, Installation and Other Services, Decorative Architectural Products and Other Specialty Products. Plumbing Products (38% of 2013 revenues): The segment manufactures and markets an array of faucets, bathing and showering devices, valves, bathtubs, spas and toilets (launched in 2012). Cabinets and Related Products (13%): The segment manufactures and sells stock and semicustom, assembled cabinetry for kitchen, bath, storage, home office and home entertainment applications in both North America and Europe. In North America, the company also sells kitchen Equity Research MAS Page 6

7 countertops, integrated bathroom vanity and countertop solutions. In Europe, it also sells readyto-assemble cabinetry for kitchen. Installation and Other Services (1%): In this segment, Masco sells installed building products, installed gutters, after-paint products, fireplaces and garage doors. The company also distributes building products in the new home construction market. The company, however, plans to divest this business into a separate independent company by mid Decorative Architectural Products (24%): The segment manufactures architectural coatings, including paints, primers, specialty paint products, stains and waterproofing products. These products are sold in the U.S., Canada, China, Mexico and South America. The company s Behr branded products are principally sold through The Home Depot. The segment also manufactures Liberty and Brainerd branded cabinets, doors, windows and other hardware which are sold to home centers, retailers, wholesalers and original equipment manufacturers. Other Specialty Products (8%): The segment manufactures a full range of windows and doors, manual and electric staple gun tackers, staples and other fastening tools. REASONS TO BUY Leading Brand Portfolio: Masco operates through various divisions with a large number of products. It is one of the leading cabinetry manufacturers in the U.S. and holds one of the largest shares in faucets. The company is also one of the major national installers of insulation for new homes. Its popular brands include KraftMaid and Merillat cabinets, Delta and Hansgrohe faucets, Behr paint and Milgard windows. The Behr brand of paints is the number one selling brand in the do-it-yourself market for architectural coatings. Masco boasts partnership with some of the biggest companies. In the direct to builder channel, it serves large homebuilders like Pulte, Lennar and D.R. Horton. In the retail channel, it has partnerships with big-box retailers like Home Depot and Lowe s. Masco is the largest supplier of non-commodity products to Home Depot s, and kitchen and bath aisle to Lowe's. Regularly Developing New Products: The company is consistently enriching its brands through international expansion and new product launches, which are critical for its future growth. New products in general contribute about 30% to the company s top line. Some successful products launched in the last four years include touch technology for faucets, KILZ PRO-X, a new paint for the pro painters, Milgard s Essence line of fiberglass and wood combination windows, and new and improved formulations for both Behr Premium Plus and Behr Premium Plus Ultra Interior. Masco also aims to grow its revenues through brand extensions. In 2012, the company expanded its Delta and Peerless brands to additional product categories with the introduction of toilets. We believe the company s leading brands, its continued focus on innovation and product launches will help drive long-term growth. Aggressive Turnaround Efforts: In 2011, the company s top and bottom lines were hampered by the slowdown in new home construction, headwinds from foreclosure activities and restrained financial accessibility. Masco undertook several strategic initiatives to cope with the challenging U.S. homebuilding industry and other headwinds like raw material cost inflation. The initiatives included the improvement of underperforming businesses like Installation and Cabinet, solidifying its market position and leveraging its brands, product introductions and product innovation, reducing costs, Equity Research MAS Page 7

8 paying off debt and strengthening its balance sheet. The company s cost-saving initiatives included business consolidations, system implementations, plant closures, branch closures, improvement in the global supply chain and headcount reductions. Over the last 6 7 years, Masco has reduced its gross fixed costs by approximately $600 million by closing around 33 facilities and 150 installation branches, and reducing headcount by more than 30,000. As regards improvement in its underperforming Cabinet and Installation business, the company has reduced losses in aggregate by $85 million in 2012 and saved another $113 million in The profit improvement initiatives resulted in about $200 million of total cost productivity in 2012 and $165 million in 2013, higher than expected in both years. In 2014, the company expects profit to improve around $150 million, largely from improvement in supply chain initiatives. In Sep 2014, concurrent with the proposed spin-off of the insulation segment, the board approved some cost savings initiatives. These initiatives target company-wide annual savings of $35 $40 million through reduction of corporate expense and simplification of Masco s organizational structure. The plan also includes cut down of approximately 40% of Masco s headquarter staff. Regular Divestures to Accelerate Growth: Masco regularly divests its less profitable and underperforming businesses to focus more on its core areas to accelerate growth and improve shareholder value. In 2012, it sold its commercial drywall, installation, millwork and framing businesses in the Installation and Other Services segment. In Dec 2013, it disposed off its Danish ready-to-assemble cabinet business to a Danish company. In Sep 2014, the company announced plans to spin-off its Installation and Other Services segment into a separate company to simplify its product portfolio, allowing it to focus more on the growing home-repair and remodeling market. Steadily Growing Repair/Remodel Activity: Currently around 70% of Masco s top line is generated by repair/remodel activity and the remaining 30% comes from new home construction. With housing starts recovering at a slow pace since the second half of 2013, Masco s growth in the last 12 months has mostly been driven by steadily growing repair and remodel activity. Lag in bigger ticket repairs, mainly in cabinets, is being offset by improving demand for small ticket repair, mainly in the plumbing and paint businesses. Lower ticket repair remodel activity is expected to continue to improve at a steady rate, going forward. REASONS TO SELL U.S. Housing Trends Slowing Down: The housing downturn and the overall economy significantly hurt consumer spending on home improvement, especially large kitchen and bathroom remodeling from Moreover, obtaining loans and finances for carrying out repairs and remodeling became difficult. Positive trends in new home construction activity from 2012 boosted the demand for Masco s home improvement products in 2012 and the first half of However, with the U.S. residential activity growth slowing down in the second half of 2013 as well as in 2014, demand has been hurt recently. Challenging Cabinetry Business: Masco s cabinet segment generated an operating loss from 2009 through Though the business became profitable in 2013, it recorded losses in the three Equity Research MAS Page 8

9 quarters of 2014 reported so far due to slowdown in housing construction, lack of big-ticket repairs and ERP-related disruption. It appears that the segment faces some new issues every few quarters. Most recently, Masco is facing issues with improving customer lead times in the Merillat brand which is expected to lead to further inefficiencies in Research Analyst Last Updated By Lead Analyst QCA Sarmistha Roy Chowdhury Kinjel Shah Kinjel Shah Kinjel Shah Content Ed. Copy Ed. Reason For Report Shikha Kansal Shikha Kansal Analyst note Equity Research MAS Page 9