Masco (MAS) – Paint Segment Primed for More Growth

Masco is a designer, manufacturer, and distributor of home improvement and buildings products in North America and internationally. Their business is divided into four main segments: Plumbing Products, Decorative Architectural Products, Cabinetry Products, and Windows & Other Specialty Products. In this note, we will focus specifically on the company’s “Paint” business within the Decorative Architectural Products segment, which makes up 28% of total revenues. Here is a quick breakdown of this segment from their November Investor presentation:

The company has the Behr brand of paint and the Kilz brand of primer which, combined, does $2B in annual revenue and is sold through Home Depot (HD) stores. As Masco points out, they have been selling their products to the Home Depot since they had two stores, so it has been a long-term relationship thus far. The one initiative that Masco/Behr have always been driving is to capture the DIY consumer . More recently, the company, along with Home Depot, have been heavily investing in going after the Pro Paint Contractor, a target market that can be worth between $250 – $300M in annual revenue. Masco has now positioned its Pro representatives in over 100 big box locations to support future growth, with plans to infiltrate over 200 locations (roughly 10% of Home Depot’s total) by year end.

In a recent survey done by Bank of America Merrill Lynch, respondents indicated to them that they are more likely to buy paint from a home center (58%) versus at a company-owned paint store (23%) or a local hardware store (16%). As BAML points out, these results are in-line with IHS estimates showing DIY consumers purchase about 60% of their paint at home centers. BAML views this trend as positive for Masco, versus competitors, given the company’s almost exclusive distribution through Home Depot, while companies like Sherwin Williams (SHW) and PPG Industries (PPG) sell mostly through company-owned stores.

Lastly, another idea to keep in mind is that Masco is always on the lookout for M&A. At a recent RBC Capital Industrials Conference, President and CEO of Masco, Keith Allman, said

“Acquisitions are a focus. Specifically on M&A, we’ve talked about $500M, in that range. Our focus is paint and plumbing. And if we should see a transformational opportunity on M&A that meets our return hurdle, is above our cost of capital, that has a culture we like that we can work with that fits with us from an ethical standpoint, that fits with us from a mindset standpoint in terms of continuous improvement and the Masco operating systems, that we can drive value, we would jump on it. Our focus is more on tuck-in and spending in that $500M range.”