Will Soft Sales & Margins Mar Mohawk's (MHK) Q4 Earnings?

Mohawk Industries, Inc. MHK is slated to report fourth-quarter 2018 results on Feb 7. The company missed earnings estimates in two and met expectations in one of the last four quarters, with average negative surprise of 3.8%. In fact, in the last reported quarter, the company’s earnings and revenues missed the Zacks Consensus Estimate by 8.4% and 2.6%, respectively. The bottom line also decreased 12.3% year over year. The results were negatively impacted by input cost inflation, higher transportation costs, a stronger dollar and tight labor market. Softening market conditions and declining product mix also added to the woes.

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release. The Zacks Consensus Estimate for the quarter to be reported has moved 0.8% downward over the past 30 days to $2.50 per share. This reflects a decrease of 26.9% from the year-ago earnings of $3.42 per share. Revenues are expected to be $2.44 billion, up 2.9% year over year.

Mohawk Industries, Inc. Price and EPS Surprise

 

Mohawk Industries, Inc. Price and EPS Surprise | Mohawk Industries, Inc. Quote

Factors at Play

Rising material costs have been impacting Mohawk’s carpet business in the United States. Again, labor, energy and fuel-related costs have been negatively impacting its results. In the first nine months of 2018, cost of sales grew more than 9%, pressurizing gross profit margins by 174 basis points. In the last reported quarter, gross margin of 28.3% or 29%, excluding charges, was down from 32.5% a year ago.

The company has been increasing the prices of its products in order to offset material and freight inflation. Meanwhile, faster rate of price increases impacted Mohawk’s results in the previous quarters. It increased freight charges to ease higher transportation costs stemming from increasing fuel, labor and common carrier expenses.

Due to the above-mentioned headwinds, Mohawk expects fourth-quarter earnings (excluding one-time charges) in the range of $2.45-$2.60 per share, which is lower than the year-ago profit level of $3.42. The company expects fourth-quarter results to be softer than that of the third quarter. It expects sales to be slightly slower than the last reported quarter in most markets and product categories.

That said, in a bid to reduce the effect of higher input costs, Mohawk has planned to undertake a comprehensive approach to improve its performance and profitability in the United States. The company has been introducing new products and executing cost reductions to improve its performance. It is also expanding internal transportation and optimizing its distribution strategy in the United States. Overall EBITDA in 2018 is expected to be approximately $1.7 billion.

It is likely to benefit from the strategy of driving growth through acquisitions, which will be reflected in the to-be-reported quarter. Meanwhile, Mohawk enjoys a strong international presence, with higher net sales being generated outside the United States. Strong international presence allows the company to capitalize on high demand in the lucrative global market.

What Does the Zacks Model Say?

Our proven model does not conclusively show that Mohawk is likely to beat estimates in the to-be-reported quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -2.89%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: It currently carries a Zacks Rank #4 (Sell).

We caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stock Worth a Look

Here are a few consumer discretionary stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat in the upcoming release:

SeaWorld SEAS has an Earnings ESP of +38.46% and it currently sports a Zacks Rank #1. The company is scheduled to report quarterly numbers on Feb 26.

Planet Fitness, Inc. PLNT has an Earnings ESP of +11.86% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Penn National PENN has an Earnings ESP of +4.76% and a Zacks Rank #3. The company is scheduled to report quarterly numbers on Feb 7.

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