vendredi 9 août 2019

Mohawk Industries (MHK) at book value

In a world obsessed by growth, by Shopify, by Amazon, by The Trade Desk, we sometimes forget old-fashioned businesses like tapestry and carpets. 

I know that very few people are excited about Mohawk. Nobody gives a fuck about that kind of business because it's not "the future". Also, metrics are OK but not great. Frankly, even me, I'm not that excited about MHK. But there's some stuff to like...

I've been a MHK shareholder in the recent past but I decided to sell my shares when I saw that growth slowed down a lot. That's the problem with a stock like Mohawk: it's a cyclical business. But it's one of the few great cyclical business. Which means that it eventually goes down, but when there's a rebound, it's a very interesting rebound.

It's important to note that, these days, you can buy a MHK share for around 115$. Which is about the book value of shares. 
Take a look at the book value multiple since 2009:
2009 BV: 1
2010 BV: 1,2
2011 BV: 1,2
2012 BV: 1,7
2013 BV: 2,5
2014 BV: 2,5
2015 BV: 2,9
2016 BV: 2,6
2017 BV: 3
2018 BV: 1,1
2019 BV: 1,1

 As we can see, the historical book value is much higher than the current level. I won't repeat the exercice for PE ratio, but it's currently 11 and the average over the last 10 years has been a little over 20. So, on a a book value and PE ratio perspective, the stock is about twice cheaper than it's historical average.

Of course, when a stock is so cheap, it's for a reason. EPS have started to drop. There's currently no growth for the stock. But it's a cyclical thing. Nothing indicates that the company will decline and vanish. It happens after a few good years.

 But EPS growth has been pretty good since 2009. See below:

2009 EPS: 1,53$
2010 EPS: 2,52$
2011 EPS: 2,92$
2012 EPS: 3,78$
2013 EPS: 6,55$
2014 EPS: 8,15$
2015 EPS: 10,20$
2016 EPS: 12,61$
2017 EPS: 13,61$
2018 EPS: 12,34$

EPS have doubled a few times over a 2 or 4 years frame (from 2009 to 2011, then from 2011 to 2013, then from 2013 to 2017). It's excellent. But they will surely drop a lot when the next recession hits us.

Also, the current debt level is pretty low which gives a lot of flexibility to the company to buy back their very cheap shares or to make an acquisiton. I think that Buffett could buy that company. However I believe Berkshire owns a tapestry company which could bring some conflict of interest. But there's very few great companies avalaible at 11 times earnings these days.

A very good idea, in my opinion, for a small position in a portfolio. Many insiders and superinvestors are also buying. Most of them are bad, but when they share my opinion, I can grant them credibility.

5 commentaires:

  1. Thank you Penetrator for another good analysis you provided us for free. We should do the same, including me.

    Patrick industries fits in the same category. The stock was beaten badly in 2018 and was trading at a P/E of around 6 in early 2019. Now it is trading at a ratio of 10. The eps keep growing and beats expectation quarter after quarter. They are diversifying their activity to don’t rely only on the RV and boating sector. However, the debt level is fairly high because of recent acquisition and this could slow the growth in the short to medium term.

    Angelo can say more than me avoir PATK because he looks like to be a shareholder for a fairly long time

  2. not a great business, but good operators. its too competitive, cyclical, constantly acquisitive, high single digit ROIC. pass.

  3. At this level, would you pick MHK or RCH? Even if it Will be tough time in a year or two...

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