For the past few years, Masco Corp. (NYSE:MAS) has been in a dubious position as a market leader in the beleaguered home improvement and building products markets. It released second-quarter results on Monday that showed decent sales and profits that beat analyst expectations, but sees a difficult end to the year and will continue to have to bide its time until industry trends improve.

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Second Quarter Sales Review
Sales eked out a 2% increase to $2 billion on a 2% increase in both the North American and International markets, the last of which saw 8% growth in local currencies. During its earnings conference call, management cited strong growth in North American plumbing sales as well as window, paint and stain sales, which were partially offset by weak cabinet sales.

Profit Recap
Looking at continuing operations, lower product costs boosted gross profit margins 100 basis points to 28.4% of sales. Operating margins also improved to 8.3% of sales. However, due to "charges for business rationalizations and the impairment of financial assets," reported results were weaker, with net income coming in at $3 million, or 1 cent per diluted share. Management relayed that earnings were 16 cents per diluted share when backing out one-time charges, or down slightly from last year's quarter.

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Past Trends and Outlook
Despite the near-term stabilization, Masco has experienced dismal top-line trends over the past few years. Sales have fallen more than 15% annually over the past three years and more than 8% each year over the past five years. Analysts expect a couple of percent sales growth this year to just over $8 billion to levels slightly below what Masco reported back in 2001. Full-year earnings are currently projected to reach 29 cents per share.

Masco expects the second half of the year to be challenging for the industry overall. Management stated its attitude is to "continue to focus on the things that we can control," which includes cost controls, customer satisfaction and selling quality products that customers demand.

The Bottom Line
Reported net income levels are also distorting the fact that Masco continues to generate decent cash flows. Efficiencies have pushed working capital down to 16.1% of sales, and although the firm didn't provide a cash flow statement during its financial press release, last year it generated just over $1.50 in free cash flow per diluted share.

In other words, Masco is staying disciplined until housing starts and other construction fundamentals return to more normalized levels. Management sees housing starts ranging from 575,000 to 625,000 for all of 2010, which is an improvement from last year but still a depressed state.


Until more consistent trends return, Masco, along with other industry participants including Lowe's (NYSE:LOW), the housing materials unit of Fortune Brands (NYSE:FO), Stanley Black & Decker, Inc. (NYSE:SWK), and Weyerhaeuser Co. (NYSE:WY), will have no choice but to bide their time until the sales and demand climate improves. (Learn about housing starts as an economic indicator in our Housing Starts Tutorial.)

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