CFA Institute Research Challenge - Atlanta Society of Finance And

Transcription

CFA Institute Research Challenge
Southern Classic
Team O
Recommendation: Buy
Recommendation: BUY
Price Target: $174.14
Mohawk Industries, Inc.
1/23/14
Mohawk Industries
Sector: Consumer Discretionary
Industry: Home Furnishings
Earnings/Share
2010A
2011A
2012A
2013A/E
Mar.
Q1
$0.30
0.34
0.58
0.73
Jun.
Q2
$0.99
0.88
1.06
1.17
Sept.
Q3
$0.74
0.68
1.01
1.64
Dec.
Q4
$0.66
0.62
0.96
1.74E
Year
$2.70
2.52
3.61
6.09E
Ticker: MHK (NYSE)
P/E
Ratio
21.10x
23.80
25.10
24.28E
Price: $147.85 (as of 1/23/14)
Highlights

Coverage of Mohawk Industries is initiated with a buy rating: Our target price of $174.14, based on DCF and multiples
valuation, warrants 18% upside from the current market price. The risk/reward tradeoff is asymmetrical to the upside, motivating
our buy recommendation. For our bull case we see 35% upside compared to 11% downside in our worst-case scenario. An
investment in Mohawk Industries means owning a superior business with a durable competitive advantage and a strong position in
the marketplace. Mohawk is run by owner-operators who are passionately focused on its long-term success while pursuing
additional growth opportunities outside of the U.S. market. Based on reasonable assumptions, we believe MHK will earn a 10%17% compounded annual return throughout our forecast period, outperforming the broader market .

Acquisitions synergies: Mohawk has been quick to realize and act on industry trends to continue to stay ahead of its competition.
The company has a substantial opportunity to improve its bottom line through synergies from three recent acquisitions.
Specifically, we estimate synergies of $101 million or $1.39/share. Over the past few years Mohawk has been going through a
transition period from a conservative use of capital to an expansion strategy. MHK is currently focused on maximizing these
acquisitions and reducing its leverage.

Sustainable competitive advantages: Mohawk’s competitive advantages within the floor covering space include: its #1 market
position with a 22% market share of the U.S. flooring market; its unparalleled in-house manufacturing and distribution systems; its
balanced and diversified revenue base throughout numerous regions of the world; patented intellectual property; and
management’s focus on protecting and growing the competitive moat already surrounding the enterprise.

Main risks associated with MHK: Rising raw materials prices, which could pressure Mohawk’s margins; a greater than expected
downturn in Europe, which accounts for roughly 25% of Mohawk’s sales; and
Average Daily Volume
900,069
a lower than expected home remodeling uptick.

Conditional drivers of additional upside: Stronger than expected remodeling
activity; stronger than expected recovery in its European end markets; and a
stronger than expected pricing environment.
52 Week Range
Beta
1.38
Shares Outstanding
72.62 M
Market Capitalization
10.74 B
Enterprise Value
12.94 B
P/E (TTM)
32.86
Institutional Ownership
79.78%
Insider Ownership
16.22%
Return on Equity
7.41%
Return on Invested Capital
5.90%
Book Value per Share
59.55
Debt/EBITDA
2.30
Operating Margin
6.56%
Net Profit Margin
4.33%
Short % of Float
3.30%
Short Ratio (Days)
1
98.40 – 155.48
1.40
Recommendation: Buy
1/23/14
Business Description
Mohawk Industries, originally founded in 1878 as a carpet mill company by four brothers of the Shuttleworth family, became incorporated
as Shuttleworth Brothers Company in 1902. In 1992 David Kolb, MHK’s former CEO, took the company public as Mohawk Industries. Its
growth has been repeatedly augmented by strategic acquisitions, with its first acquisition in 1920. Since, Mohawk has acquired over 25
companies expanding its operations across the world. MHK is currently headquartered in Calhoun, GA with 25,100 employees.
Mohawk Industries began many decades ago originally as a manufacturer of carpeting for residential and commercial customers. Mohawk
was largely built via strategic acquisitions during the 1980’s and 1990’s. With increased size from each acquisition came increased scale to
its business operations and additional opportunities for savings via vertical integration. MHK has a strong competitive advantage in the
production of carpet, rugs, ceramic tile, laminate, wood, stone and vinyl flooring due to the company’s vertically integrated and unparalleled
manufacturing and distribution systems. Mohawk’s industry-leading innovation has produced products and technologies that differentiate its
brands from that of its competitors by satisfying all remodeling and new construction requirements. However, the most important
competitive advantage was the reaching of a critical tipping point that enabled the company to forgo third party distributors and bring its
distribution system in-house. MHK’s distribution platform allows them to efficiently and effectively serve a diversified base of over 25,000
retailers. Mohawk’s largest customer, Home Depot, represents less than 5% of total sales – a level that has remained largely unchanged for a
long period of time.
Flooring is one of the few home improvement channels that the large home center chains have been unable to consolidate. Flooring
companies are different than most retailers in that consumers purchase the product by viewing samples, and instead of taking it home from
the store, the majority of flooring is delivered at a later date. Retailers typically do not keep most flooring products in stock because it is
uneconomical to do so. Carpet in particular takes up a lot of space and the majority of potential selections turn very slowly. As a result of
flooring’s atypical supply chain, the manufacturer is in the prime position while the retail side of the marketplace remains fragmented.
Thanks to Mohawk, start-ups and small flooring shops can compete with large corporations such as Home Depot and Lowe’s by offering an
equally wide selection of products all while still competing successfully on price. So while Home Depot and Lowe’s typically represent a
large percentage of most of its vendors’ sales, these large retail chains remain only a small part of Mohawk’s business. In fact, Mohawk is
far more important to all of its retailers businesses, including Home Depot and Lowe’s, than any single retailer is to Mohawk’s business.
Soft surfaces, such as carpet and rugs, constitute roughly 53% of U.S. flooring sales and 58% of volume, but have been slowly losing share
to hard surfaces like laminate, tile and wood. Mohawk has been fast to realize these trends, so in 2000 the company established a hard
surface sales team to sell other manufacturer’s products through its distribution channel to its 25,000+ retail customers, exposing them to the
non-carpet side of the business and diversifying its portfolio away from carpets. Wanting to vertically integrate into this area, in 2002,
Mohawk spent $1.8 billion to acquire Dal-Tile, the dominant tile company in North America. In 2005 Mohawk spent $2.6 billion to buy
Unilin, a leading laminate supplier in Europe and North America. Then, in 2007 MHK purchased the manufacturing assets of Columbia
Wood, a U.S. hardwood-flooring manufacturer.
Today, Mohawk controls just over 22% of the U.S. flooring market. The second largest player, Shaw Industries, controls approximately 21%
of the market. Shaw Industries is a unit of Berkshire Hathaway and these two companies effectively operate a flooring duopoly, as the next
largest competitor, Armstrong World Industries, is only one-fourth the size of Mohawk and controls under 6% of the market. Due to the
economics of flooring distribution, we don’t see the industry structure changing dramatically over time. This makes Mohawk, as an industry
leader, a particularly appealing long-term investment.
Over the past decade, Mohawk has altered its business from primarily an American carpet manufacturer into the world’s largest flooring
company. MHK has operations in Australia, Canada, Europe, Malaysia, Mexico, Russia and the United States, along with operations through
joint ventures in Brazil, China and India. MHK’s brands are among the most recognized in the industry and include American Olean,
Bigelow, Dal-Tile, Durkan, Karastan, Lees, Mohawk, Unilin, Quick-Step and recently acquired Marazzi and Pergo, among others.
Mohawk’s three operating segments and their respective percentage of 2012 total sales are Carpet (50%), Ceramic (28%) and Laminate &
Wood (23%). In 2012 Mohawk Industries had annual net sales of $5.78 billion of which approximately 83% was generated by sales in North
America and 13% by sales outside North America. Mohawk’s 2012 operating margin was 6.56%.
The Carpet segment, formerly known as the Mohawk segment, is one of the premier carpet and hard surface brands in North America. It
designs, manufactures, sources, distributes, and markets its floor covering product lines, which include carpets, ceramic tile, laminate, rugs,
carpet pads, hardwood and resilient for residential and commercial applications in both remodeling and new construction. Mohawk has
positioned its premier residential carpet and rug brand names across all price ranges to allow for a diversified customer base. Horizon,
Karastan, Mohawk and WundaWeve are all positioned to primarily sell in the medium-to-high retail price channels in the residential
broadloom market. MHK’s Karastan is also a leader in the high-end market, while the Aladdin and Mohawk Home brand names compete
primarily in the value retail channel. The company also markets its hard surface product lines, including Congoleum, Mohawk Ceramic,
Mohawk Hardwood and Mohawk Laminate across all price ranges. Carpet had 2012 annual revenues of $2.9 billion and an operating margin
of 5.4%.
Mohawk’s Ceramics segment, formerly known as the Dal-Tile segment, is the largest manufacturer of ceramic tile and distributor of natural
stone in North America and supplies a vast array of commercial and residential products under the American Olean, Dal-Tile and Marazzi
brands. Dal-Tile, established in 1947 and acquired in 2002, gives Mohawk a dominant position in the North American tile business with a
40% market share. Tile is similar to carpeting as it is often purchased from showroom samples and delivered and installed at a later date. The
ceramic tile industry is meaningfully more fragmented than that of the carpet industry, with more than 100 tile manufacturers competing for
sales of ceramic tile to customers in the U.S. Although the tile industry is highly fragmented, MHK is one of the largest manufacturers,
distributors and marketers of ceramic tile in the world, selling tile through its existing distribution network to the same 25,000+ retailers who
sell its carpeting products. However, it also sells tile through Dal-Tile’s separate distribution systems, which includes 250 warehouses and
showrooms across the United States and Canada. Dal-Tile has an annual manufacturing capacity of roughly 500 million square feet, the
largest ceramic tile manufacturing capacity of any U.S. based manufacturer. Dal-Tile is the only significant manufacturer in the United
States with its own North American distribution facilities. Mohawk and Dal-Tile’s vertically integrated distribution systems give the
2
Recommendation: Buy
1/23/14
company a very distinct competitive advantage that no other company can match, making it tough to steal market share away from Dal-Tile.
MHK’s Ceramic segment realized $1.6 billion in annual revenues during 2012 with an operating margin of 7.5%.
Mohawk’s Laminate & Wood segment, formerly known as the Unilin segment, designs, manufactures, licenses, distributes and markets
laminate and hardwood flooring. Unilin, one of the most innovative companies in the industry, gives Mohawk a manufacturing presence in
the laminate flooring category. Laminate & Wood’s products consist of chipboards, medium-density fiberboard (MDF), high-density
fiberboard (HDF), and insulation panels and boards. Laminate & Wood’s Quick-Step and Columbia brands are among the world’s most
recognized names in laminate and hardwood flooring with the Quick-Step brand currently being carried by approximately 95% of the top 50
retailers. The majority of other laminate flooring companies around the world pay royalties to Unilin to utilize its patented installati on
system, UNICLIC, which allows laminate flooring to be quickly and easily assembled by snapping it into place. Unilin also gives Mohawk
exposure to Europe where two-thirds of Unilin’s business takes place. In January 2013, Laminate & Wood welcomed the Pergo brand name
into their laminate collections for $150 million in cash. Pergo is a manufacturer of premium laminate flooring and enhances Mohawk’s
geographic position while providing a platform to further leverage Unilin’s patented technologies. Laminate & Wood had 2012 net sales of
$1.35 billion and an operating margin of 9.4%.
2012 External Sales by Segment
2012 EBIT Contribution by Segment
Mohawk
(Carpet)
Mohawk
(Carpet)
23%
50%
33%
Dal-Tile
(Ceramic)
28%
32%
Unilin (Laminate
& Wood)
42%
Dal-Tile
(Ceramic)
Unilin (Laminate
& Wood)
Management Analysis
Mohawk’s CEO, Jeff Lorberbaum, along with the other key executives, owns 16.22% of the equity in the company. When management has
a big stake in the future of the business it helps confirm our analysis that the company is moving in the right direction, especially since
MHK’s management is very smart, ethical and focused on protecting and growing the competitive moat surrounding the enterprise. With a
leadership team that is experienced in the nuances of the flooring industry, Mohawk has seen continued growth in all its segments. Mr.
Lorberbaum’s thirty-five years of industry experience and thirteen years of service to Mohawk have produced nearly 70% growth in net
sales. Mohawk’s management has extensive experience in the floor covering industry and has experienced both the ups and downs through a
full economic cycle. This positions Mohawk well as its management team is able to learn from past conditions and help grow Mohawk’s
business through all future economic conditions. MHK’s management team has proven to be quick in realizing industry trends and has
actively acted through organic and inorganic growth and accretive use of free cash flow. Mohawk’s current policy is to retain all net earnings
for the development of its business and does not anticipate deploying any cash to shareholders through dividends in the foreseeable future.
Two out of the four Chief Officers joined the company after an acquisition, which brings a balanced approach to both the quantitative and
qualitative aspects of acquiring additional companies. The executive team members’ previous experience in the flooring and tile industry
allow them to remain grounded to the products they sell, while simultaneously approaching macro-economic challenges and opportunities
strategically.
This sustained growth stems from management’s strategic expansion into untapped global markets. Management’s decision to acquire Pergo,
Marazzi, and Spano over the past year has allowed Mohawk to broaden its reach into Europe. There are a few reasons why management
decided to do this. With stalled growth in the U.S., Mohawk can use these acquisitions to limit the amount of risk they are exposed to in the
United States housing market. In uncertain economic waters, these new components can help extend Mohawk’s growth prospects. Similarly,
in the current down market, Mohawk is possibly buying these companies at a discount and at a low point of the cycle. As the market
improves, the full value of these companies will be realized and help drive top line growth. Mohawk’s management has proven that their
global expansion strategy is not only realistic, but can pay dividends quickly. Management’s hesitation to jump into certain foreign markets,
most notably China because of market opacity, proves that searching for future growth catalysts must not always come from emerging
markets.
Mohawk’s management has recently stated that while they will continue to seek out potential growth opportunities, they believe most of the
continued strong growth on its top and bottom line will come not from future acquisitions, but by furthering the synergies created from their
recent acquisitions. Once again, management’s focus continues to be on creating and realizing growth in the opportunities that are both
realistic and manageable. These opportunities will allow Mohawk to continue to maintain a large portion of the market for carpet and tile
across the world, especially as their global footprint grows. With these acquisitions synergies, Mohawk is becoming somewhat paradoxical;
they are increasing in size, but becoming leaner and smaller. This management strategy is creating a very strong company, one that can
produce, sell a low cost product across the globe and outperform its competitors. We are very confident in Mohawk’s management to
continue pursuing accretive acquisitions to help enhance and grow its operations all while remaining an industry leader.
3
Recommendation: Buy
1/23/14
Acquisition Analysis
Over the course of 2013, Mohawk engaged in three strategic acquisitions to diversify its revenue stream and continue the execution of its
global expansion strategy. Mohawk acquired Pergo, a European and U.S. laminate manufacturer with an extensive patent portfolio; Marazzi,
a ceramic manufacturer with a presence in Europe, Russia and the United States; and Spano, a Belgian chipboard manufacturer. These
acquisitions enhance MHK’s core business by diversifying its revenue base and adding to its top-line, but we believe the acquisitions will
ultimately be accretive to Mohawk’s bottom line as well. After these three acquisitions, Mohawk’s sales mix is geared more towards Europe
and less towards the U.S. than that of its competitors. We believe that this is due to the company’s already dominant market position in the
U.S. and believe it is wise to gain more exposure to Europe as the European economy begins to recover. Not only is Mohawk poised for
growth from the recovering U.S. housing market, the company is now strategically positioned to take full advantage of a recovering
European economy.
Mohawk completed the acquisition of Pergo early in the first quarter of 2013. Pergo is a leader in premium laminate flooring in the U.S. and
Europe and had 2012 sales, excluding dropped products, of $300 million and an operating margin of 4.5%. Pergo has strong brand
recognition within the industry, as they were the first to introduce laminate flooring in the U.S. Pergo complements Mohawk’s specialty
distribution with its DIY channel and will allow for synergistic opportunities within Laminate & Wood. Pergo’s synergies will be primarily
driven by cost reductions and efficiencies from the closing of both Pergo’s plants in Sweden, increased leveraging of its plant in Belgium,
administrative consolidation and product innovation. Pergo’s patent portfolio will also enhance Unilin’s already extensive patent portfolio.
Mohawk’s purchase price of $150 million represents 6x Pergo’s 2012 EBITDA.
Mohawk completed the acquisition of Spano Group in May 2013. Spano is a leading Belgian chip and melamine board manufacturer and
had 2012 sales, excluding discontinued raw material sales, of $230 million and an operating margin of 7.5%. Spano’s products are primarily
used in furniture and building products. Mohawk acquired Spano Group for $164 million representing approximately 6x Spano Group’s
2012 EBITDA. Spano’s product categories and distribution capabilities complement Unilin and will create additional operational
opportunities. The majority of improvements from Spano Group will be due to better asset utilization by optimizing manufacturing assets
and raw materials, increasing utilization and improving production efficiencies, leveraging technology, and combining Mohawk’s legacy
sales with Spano’s operations from a pricing, raw materials purchasing, and manufacturing efficiency standpoint.
We expect operating efficiencies from the acquisitions of Pergo and Spano to improve Laminate & Wood’s operating margin 235 bps to
10.5% in 2013 and another 200 bps to 12.6% in 2014, representing roughly $56 million and $54 million in synergies in 2013 and 2014,
respectively.
Mohawk acquired Marazzi early in the second quarter of 2013 for approximately $1.5 billion through a combination of cash and equity,
which represents 8x Marazzi’s 2012 EBITDA. Marazzi is a leading manufacturer of ceramic tile in Russia, Western Europe and the U.S.
Marazzi is a leader when it comes to innovation with worldwide brand recognition and product lines including glazed ceramic, glazed
porcelain, technical tile and color body porcelain. Ceramic’s acquisition of Marazzi was a growth-oriented merger as opposed to a
consolidation-oriented merger, and will help diversify Mohawk’s revenue stream away from carpets. Marazzi has the number one position in
the Russian ceramic market, which is similar in size to the U.S. market. Ceramic tile remains the world’s most widely utilized flooring
product with an estimated worldwide consumption of 110+ billion sq. ft. and annual growth of 5%-6%. From a North American production
standpoint, Marazzi and Dal-Tile have, by far, the most capacity in the North American market. Marazzi will help expand Mohawk’s
position as a worldwide leader in ceramic tile while providing additional growth opportunities.
This acquisition will allow Mohawk to optimize its assets, products, and sales strategies in the U.S. and allow Mohawk to enter the Western
European market at a low point where the company will be able to capitalize on an recovering European economy. Mohawk will also be able
to add more capacity as the company expands the Sunnyvale (Texas) plant. This plant will allow them to go into much larger sizes, such as
24 x 48 planks, where Mohawk previously was unable to do so. More specifically, we expect Marazzi, which had approximately $1.16
billion of sales and a 10.5% operating margin in 2012, to improve Ceramic’s operating margin 170 bps to 10.7% in 2013 and another 100
bps to 11.7% in 2014, representing roughly $62 million and $47 million in synergies in 2013 and 2014, respectively. These synergies will
be driven by European cost reductions, replacing third party products with in-house products, and an improved product mix through more
sales in higher growth areas such as Eastern and Western Europe.
Overall we expect Mohawk’s three recent acquisitions of Pergo, Marazzi and Spano, which were completed in January, April and May of
2013, to all result in meaningful synergies to Mohawk’s business. Over the next 12-18 months, we estimate these synergies will represent
roughly $101 million or $1.39/share.
Sales Mix by Geography
2012 Sales Mix by End Market
Western
Europe
Russia
20%
24%
Commercial
5%
70%
5%
Rest of
World
North
America
76%
4
Residential
Recommendation: Buy
1/23/14
Industry Overview & Competitive Positioning
The worldwide flooring industry has seen incredible growth over the past few decades. Demand growth has been especially robust in
western industrialized nations as their populations have grown steadily and their standards of living have increased rapidly. As wallets have
grown and credit markets have grown even faster, people have shelled out both for bigger living spaces and nicer flooring arrangements. As
we continue to look at Mohawk Industries we will of course want to pay close attention to the U.S. flooring industry in particular as it
accounts for 70% of post-acquisition revenue. The U.S. home-remodeling industry as a whole was hit hard by the 2008 recession and the
flooring industry was certainly no exception to that. Remodeling-project spending decreased by 35% from its 2006 high as the housing
market began the recession by declining over the 2007-2009 period. This was due to the fact that remodeling spending is approximately 80%
correlated to housing prices, which also fell about 35% over that time period. The home-remodeling industry benefits highly from increasing
home prices as projects become smaller as a proportion of total home cost, and consumers feel the wealth effect from the positive net equity
in their homes. Conversely though, when home prices decrease and net home equity plunges as it did in 2008, flooring companies are
pressured as consumers worry more about keeping their homes than improving them.
To provide just one example of this effect, carpet demand stood at nearly 1.8 billion square yards in 2006 but by 2009 this had fallen to just
below 1.1 billion square yards, a 40% decrease. Part of this has to do with shifting trends in consumer tastes, which we will get into later, but
most of it was certainly due to the housing collapse. Over the next three years, demand showed little improvement as 2010-2012 carpet sales
were range-bound between 1.0-1.1 billion square yards. Thankfully for MHK and the rest of the industry, 2013 is the year that things are
finally picking up for flooring companies as housing prices have increased 11% year-over-year from 2012 after three years of flat to no
growth. Net home equity is also just starting to increase as it was also flat around $3.5 trillion from Q1 2010 through Q3 2012, and it wasn’t
until Q4 2012 that it increased to $3.9 trillion and further increased to $5.1 trillion by Q2 of 2013. This is despite the fact that housing prices
remain 10-20% below their 2006 levels. Additionally, home-remodeling spending remains 24% below 2006 levels and 13% below the 2.5%
CAGR trend since 1990. In fact if residential remodel spending were as euphoric today as it was in 2006 (40% higher than the 2.5% CAGR
trend) then remodel spending would have to nearly double from current levels. However, much of that demand was fueled by debt, and the
values of HELOCs are 90% below its 2006 peak, despite low rates. Though this likely indicates pent-up demand and indicates we are still
likely very early in the housing recovery. The delayed response that housing has shown to the economic recovery means that there is truly a
historic pent-up demand for remodeling projects and flooring in particular. Through a series of smart and well-timed acquisitions, MHK has
positioned itself as the largest flooring company in both the U.S. and the World, and remains uniquely positioned with its diverse product
mix to take advantage of this return of demand for flooring products. To explain why, we will start with MHK’s largest segment, softsurfaces.
In 2012, total U.S. carpet sales stood at 1.04 billion square yards (flat over 2010 and 2011). This level of carpet demand hasn’t been seen in
the U.S. in close to 30 years, when in 1983 carpet sales were slightly higher at 1.09 billion sq. yds. To put that number in perspective, the
U.S. population over that time has increased by 36% from 233 million to 317 million, and in addition the average single-family home size
has increased from 1,565 sq. ft. to 2,169 sq. ft., roughly a 39% increase. Based on these numbers, carpet demand today should stand at just
over 2 billion square yards, double what it is today. However, U.S. tastes have changed and consumers have shifted some of their demand
away from soft-surfaces and today soft-surfaces make up about 53% of the total U.S. flooring industry versus the 60-65% they used to. Still,
even when one discounts the 2 billion number by the change in consumer tastes, carpet sales should still be around 1.4-1.6 billion sq. yds.,
50% higher than they are today based on increased home sizes and population growth. MHK controls 26% of the U.S. market share when it
comes to carpet and carpet makes up approximately 40% of its post-acquisition total revenue. This market share is second only to Shaw
Flooring, which makes up 31% of U.S. carpet sales. Carpet is the only category of flooring that MHK is not both the U.S. and worldwide
leader in sales, but this is perfectly fine in the view of management in light of MHK’s acquisitions over the past 10 years.
2012 U.S. Flooring Industry ($19 Billion)
2%
6%
5%
13%
52%
12%
10%
Carpets & Rugs
Hardwood
Ceramic
Laminate
Stone
Other
Vinyl
MHK completed 12 soft-surface acquisitions over the span of 1992-2000, but has not had a single soft-surface focused acquisition since that
time. Carpet sales as a percentage of total flooring are decreasing by about 1% per year as consumers are opting for more expensive products
like laminate, hardwood, and ceramic tile. This is exactly where MHK has been focused since its acquisition of Dal-Tile in 2002, which gave
them the leading U.S. position in the ceramic tile market and opened them up to an international manufacturing base. They later entered the
Chinese ceramic market through a joint venture in 2010 via Sanfi and recently obtained the title of world leader in the ceramic tile market
with its acquisition of Marazzi. With the Marazzi acquisition completed, Mohawk now controls 42% of the U.S. ceramic tile market with the
next six largest competitors controlling just 17% of the market, the largest of which amounts to just 5% of total U.S. sales. This is perfect for
Mohawk because even though ceramics make up the dominant position in countries like China (66% of total flooring sales), the market is
just starting to heat up in America. Ceramics consisted of just 12% of all U.S. flooring sales in 2012 (18% if you include stone), and it is the
fastest growing category with low double-digit year-over-year percentage growth. The Marazzi acquisition also gave them the leading
ceramics position in Europe, a region that was more recently in recession, and should have a delayed recovery relative to the U.S. Following
ceramics, the next fastest growing segment as a percentage of total U.S. flooring sales are the hardwood and laminate products, which are
experiencing mid-level single digit percentage growth.
5
Recommendation: Buy
1/23/14
MHK first opened its position in the laminate market with its 2005 acquisition of Unilin, which provided the company with the leading U.S.
player by market share and also gave Mohawk its first European presence. Mohawk later expanded its laminate and international exposure in
2012 via the ARAUCO joint venture, which brought its laminate products to Brazil, another high growth market. Finally, MHK’s recent
acquisition of Pergo in 2013 has provided the company with the most-respected brand among laminate producers and gives Mohawk a
dominant position in the mid to high end laminate market while expanding its European presence further. Hardwood flooring was the last
segment MHK entered, with no positions until its 2007 acquisition of Columbia, which also added to its manufacturing base in Asia.
Together these acquisitions provide MHK with the largest hardwood and laminate base of any producer in the world, and they have also
reduced the exposure to the performance of the U.S. market as 25% of sales are now in Europe and Russia. Laminate and Wood make up
25% of MHK’s sales while Ceramics comprise another 35% of sales. Together MHK has 60% of its sales tied to the fastest growing
segments of the U.S. and European flooring market and yet retains a dominant position in the duopoly that is the U.S. carpet market. Even if
carpet continues to steadily decline as a percentage of total flooring expenditure, MHK will be able to offset the losses wit h gains in its
newest segments. Its primary competitor Shaw Flooring on the other hand does not have as much of this luxury, as it is much more reliant on
carpet. In the end however, a rising tide lifts all boats and that is what is coming for the U.S. (and later the European) flooring market. Still
MHK will remain the most buoyant of the bunch should the tide start to recede once more as it has expanded its international presence and
has the greatest diversity of product mix. Additionally MHK has the vertical integration and distribution network that none of its smaller
competitors can boast and this helps to keep costs low and boost the bottom line.
The distribution network of MHK is state of the art and has only become more efficient in each acquisition phase. More often than not these
acquisitions have come directly after a recession, which has allowed MHK to purchase each company at a relative discount. Indeed they
began following the brief early 1990’s recession, had another acquisition in 2002 following the dot-com bubble, and lastly the company has
had no less than four acquisitions since the crash of 2008. Still, even with the streamlining of distribution that has occurred following these
acquisitions, distribution remains a major challenge for most flooring companies. Consumers today have more flooring options available to
them than ever before thanks to the introduction of both new materials and the ever-increasing pallet of design options. Each region of the
world also exhibits differing trends in its flooring preferences, with the U.S. preferring carpet and hardwood, while ceramics have a larger
presence in Asia and Europe. Due to the vast array of tastes that flooring companies must cater to, and the addition of relatively low margins
and high infrastructure costs, it has been virtually impossible for one or a few companies to consolidate the distribution on a worldwide basis
until recently. MHK is finally realizing both American and European distribution synergies thanks to its recent acquisitions. It can finally say
that as the global leader in flooring that it is also the global leader in flooring distribution systems. In North America alone MHK has over
300 distribution points, 600 trucks, and over 1500 sales reps. This helps Mohawk get their products to the various North American
distribution destinations which are comprised of 31% home centers, 16% contractors, and 51% specialty stores. The company has also
utilized technology upgrades to make the consumer experience better than ever. The customer can now track their order in real-time while
the company’s sales force can see updated sales data and market opportunities in real time as well. Customers are also always pleased to hear
that MHK is the most eco-friendly of manufacturers and is the only flooring company to make Newsweek’s top 500 green companies list
each year.
Overall the flooring industry remains fragmented both in the U.S. and around the world, and it is still quite depressed from the recession of
2008. However consolidation over time is a real and swiftly occurring thing with MHK soundly in the lead. Mohawk has the biggest boat in
an ocean of producers, its one of the only ones who can cross over to international waters, and its the most cost-efficient and consumer
friendly of its peers. As the flooring industry recovers in the near term we should expect MHK’s revenue and profits to grow with the rest of
the industry, but we shouldn’t be surprised to also see the company as the best prepared if another downturn does occur.
2012 U.S. Floorcovering Distribution
Channels
2%
Specialty Stores
31%
51%
16%
2012 U.S. Industry Sales
($19 Billion)
Residential
Replacement
27%
Contractor
13% 60%
Home Centers
Builder
Commercial
Other
Mohawk Industries, Inc. – SWOT Analysis
Strength – Vertical Integration System
MHK’s operations are vertically integrated as the company has a wide range of facilities for the manufacturing, distributing and marketing
of flooring essentials. Within MHK’s Carpet segment its facilities include the extrusion of resin and post-consumer plastics into
polypropylene, polyester and nylon fiber, yarn processing, backing manufacturing, tufting, weaving, dyeing, coating and finishing. MHK’s
Ceramic segment is also vertically integrated from the production of raw materials for body and glaze preparation to the manufacturing and
distribution of ceramic and porcelain tile. MHK’s Laminate & Wood segment is the largest vertically integrated laminate flooring
manufacturer in the United States, producing both laminate flooring and interrelated high-density fiberboard. Unilin incorporates
manufacturing, licensing, and marketing of laminate and hardwood flooring in Europe and the U.S. These combined operations give
Mohawk an edge over its competitors, which can be seen by its strong market share position.
Strength – Strong Distribution and Customer Base
Mohawk has a diversified customer base with more 25,000 customers, including home centers, mass merchandisers, commercial dealers,
department stores, commercial end users and independent floor covering retailers. Its strong diversified customer base allows the company to
not be reliant on any single customer. In 2012 no single customer accounted for more than 5% of total sales while the top 10 customers
accounted for less than 20% of MHK’s net sales. Mohawk also markets its products through private labeling programs. Its customer base is
diversified among various channels including government and healthcare facilities, corporate offices, educational institutions, hospital
6
Recommendation: Buy
1/23/14
facilities, and retail and public space. Each product category is marketed through a separate distribution channel and sales force. MHK owns
and operates a wide network of regional distribution and sales services centers in Asia, Europe and the U.S. Mohawk also offers marketing
and advertising support through dealer programs such as Mohawk Floorscapes, Mohawk ColorCenter and Karastan. Its strong distribution
and customer base allows the company to have substantial brand recognition among carpet dealers and retailers along with strong customer
recognition within the industry.
Strength – Wide Range of Products and Brands
MHK is the leading producer of high quality flooring products for both the residential and commercial spaces. Mohawks products include
carpets, carpet cushion, ceramic tile, fiberboard, hardwood floorings, natural stone, rugs, vinyl, wood stone and other home products. The
company is one of the largest carpet and rug manufacturers along with marketers and distributors of ceramic tile, hardwood flooring and
natural stone in the United States, and one of the leading fabricators of laminate flooring in Europe and the U.S. MHK designs,
manufactures, distributes and markets a wide range of product categories under specific brand names consisting of Aladdin, Bigelow,
Durkan, Horizon, Karastan, Lees, Merit, Mohawk, Mohawk ColorCenters, Mohawk Floorscapes, Portico and SmartStrand. Further, Mohawk
has positioned its premier residential carpet and rug brand names across all price ranges to allow for a diversified customer base. Horizon,
Karastan, Mohawk and WundaWeve are all positioned to primarily sell in the medium-to-high retail price channels in the residential carpet
market. MHK’s Karastan is also a leader in the high-end market, while the Aladdin and Mohawk Home brand names compete primarily in
the value retail space. MHK also markets its hard surface product lines, including Congoleum, Mohawk Ceramic, Mohawk Hardwood and
Mohawk Laminate across all price ranges. Mohawks wide brand and product portfolio helps position the company to meet increasing
demand while maintaining and growing its market position.
Strength – Patent and Trademark Portfolio
Intellectual property is important to the company’s business as it helps maintain a competitive advantage over its peers. MHK has 30
trademarks that represent innovations and provide the company with a competitive advantage and differentiation from competing brands in
the industry. Unilin owns a number of important patents in Europe and the United States, of which some are licensed to manufacturers and
distributors throughout the world, providing the company with additional licensing revenue. Licensing revenue from patents was
approximately €80 million in 2012. The most important of these patent families is the UNICLIC family, which includes the snap, pretension,
clearance and the beveled edge patent. These patents are not set to expire until 2017, protecting Unilin’s interlocking laminate flooring
technology for a few more years.
This year, Mohawk invested $180 million in a proprietary polyethylene terephthalate (PET) process, Continuum. MHK’s Continuum process
is expected to change the game when it comes to polyester carpet – a business that currently represents $1.5 billion, or approximately 35% of
the $4.5 billion residential carpet market. Currently, most PET innovation has been driven around reducing costs, not making a product
better. Mohawk’s patent-pending Continuum process is the most superior PET carpet that “starts clean and stays clean”. After the raw
material is put through Continuum’s multi-step purification process that reduces 95% of lubricants on the fiber, the final product will resist
soil build-up and withstand traffic better than any competitive PET carpet. This innovative new technology could prove significant if the
patent is approved, as cleanability is a primary concern for 69% of consumers. This is only another example of Mohawk’s ability to continue
being an innovator in the flooring industry.
Threat – Intense Competition
The flooring industry is highly competitive and fragmented. Mohawk’s primary competitors include Shaw Industries, Armstrong World
Industries, Interface and Masco Corporation. MHK also competes with various other companies since North America is saturated with the
world’s top carpet and rug manufacturers. Service, style, quality, price, product innovation and technology are the principal methods of
competition within the floor covering industry. Price competition and market coverage are particularly important because there is limited
differentiation among competing product lines. MHK differentiates its business by investing in manufacturing equipment and distribution
systems, patented technologies, as well as through its marketing strategy. This allows MHK to compete effectively and maintain a durable
competitive advantage. To maintain its market position, Mohawk will need to sustain the competitive pressures taking place in the flooring
industry.
Porters Five Forces Analysis
Bargaining Power of Buyers (3)
Mohawk Industries faces weak buyer power because individual consumers are very fragmented and have very little influence on price. In
2012, no single customer accounted for more than 5% of total sales while the top ten customers accounted for less than 20% of MHK’s net
sales.
Conclusion: Limited buyer power.
Bargaining Power of Suppliers (3)
Mohawk Industries more than likely faces some amount of supplier power simply because of the costs it incurs when switching supplies for
raw materials. However, suppliers that do a large amount of business with MHK are also somewhat bound to its customers, such as Mohawk
Industries. Mohawk is also vertically integrated including the production of some raw materials therefore making supplier power nonexistent
for some parts of Mohawk’s business segments.
Conclusion: Limited supplier power.
Threat of New Entrants (4)
Given the amount of capital investment needed to produce flooring products, as well as the need for a strong diversified distribution and
customer base, the threat of new entrants is fairly low in the industry.
Conclusion: Low threat of new entrants.
7
Recommendation: Buy
1/23/14
Threat of Substitutes (1)
Within the flooring industry there are very few major brands, such as Mohawk Industries, Shaw Industries, and Armstrong World Industries,
however the substitutability of these major brands is very high.
Conclusion: High threat of substitutes.
Degree of Rivalry (2)
Consumers in the flooring industry enjoy an option of brands and while many consumers prefer a certain brand, switching costs are
extremely low. It does not cost a consumer to buy one brand of flooring instead of another. This, along with a variety of other factors,
including the forces already examined, makes the industry quite competitive.
Conclusion: High degree of rivalry.
Threat of New
Entrants
4
3
2
Rivalry of
Bargaining Power
1
Competitors
of Suppliers
0
Mohawk Industries
Threat of
Substitution
Bargaining Power
of Buyers
Investment Summary
We are initiating coverage on Mohawk Industries with a buy rating and a 12-month target price of $174.14. Not only are we looking
for robust EBITDA growth, we are looking for MHK to be rewarded a higher EV/EBITDA multiple from about 9x historically to 11.5x next
year. Mohawk is a dominant player in the global flooring industry with an experienced management team. The company is making some
very important and transformative acquisitions that we expect to continue and will drive its business going forward. We believe that the $101
million of synergies will flow through resulting in a stronger, more profitable business. Also, if Europe turns the corner, which we are
expecting, more than one-fourth of Mohawk’s revenue base is there, offering additional upside potential.
MHK is a buy based on a recovering economy, its competitive advantages, its leadership and its valuation. Over recent years Mohawk has
been very cheap on extremely depressed earnings. Not only are earnings now improving based on cyclical and secular certainties they are
also improving as the size and scope of the business has been meaningfully enlarged through Mohawk’s recent acquisitions. These three
strategic acquisitions expose Mohawk to different economies of the world and will allow the company to continue taking market share both
internationally and domestically. We reiterate that Mohawk Industries is run by an experienced management team with a large stake in the
future of the business and are passionately focused on its long-term success while pursuing additional growth opportunities outside of the
U.S. market. We expect MHK to outperform its peer group and believe estimates for next year, including our own could prove to be low.
Valuation
For our valuation of Mohawk Industries, we relied on a discounted cash flow analysis (DCF) and multiple analysis. We have arrived at a
one-year price target of $174.14 for Mohawk. This comes from a combination of our DCF model, EV/EBITDA multiple, and P/E multiple
as well as our bull, base, and bear case scenarios. We weighted the bull case at 30%, base at 50%, and bear at 20%; reflecting our opinion
that higher growth and margin expansion is expected. Our different models were weighted 25%, 50%, and 25% for DCF, EV/EBITDA, and
P/E respectively. This is concurrent with our belief that EV/EBITDA is the most effective way to value this company.
Discounted Cash Flow
In our view a discounted cash flow model is less than ideal for valuing Mohawk Industries due to the increased difficulty of forecasting its
future free cash flows following three major acquisitions. That being said, our model assumes successful integration of the acquisitions and a
300 basis point margin increase for each addition. The model is highly sensitive to a number of factors including:





Assumed growth rates for sales: The growth rates assumed for each line item directly affects our estimated free cash flow, and in
turn our overall value. We have assumed a conservative 5% CAGR in sales based on a rebounding domestic economy. Another
economic downturn domestically or a more prolonged recession in Europe could negatively affect these assumptions.
Margin expansion from integration of acquisitions: We estimated a higher growth rate for operating income than for sales to
account for the expansion of margins after a successful integration of all three acquisitions. The company taking longer to integrate
or failing to meet our projected synergies would negatively affect our value.
Capital Expenses: We have assumed a higher than normal capital expense of $500 million decreasing to a “normalized” $350
million to account for the cost of integration. If it requires even more money than estimated it will directly reduce our free cash
flow assumptions.
Discount Rate: To determine an appropriate discount rate we used the weighted average cost of capital (WACC). Changes in this
rate can lead to huge swings in our estimated value. We assumed the company will maintain its current capital structure and used a
weighted average of their current debt issues to determine the cost of debt. We used the capital asset pricing model (CAPM) to
estimate the cost of equity. In the CAPM we calculated a beta of 1.38 by using the S&P 500 as a proxy for the overall market for
the three-year period ending December 20, 2013. We assumed a risk free rate of 3%, which is equal to the yield on a 10-year
treasury note. Our expected market return is a conservative 8% due to our current view of an expensive market. This estimate for
cost of equity is not perfect but we believe it yields a close approximation and also that our estimated WACC is a good
approximation of the appropriate discount rate.
Terminal Growth Rate: We assumed a 3.0% annual growth rate, which is similar to U.S. GDP growth. If the U.S. economy
slowed down we would have to revise this downward and it would significantly lower our valuation.
8
Recommendation: Buy
Valuation Football Field
Valuation Method
Multiple Analysis
We believe the most accurate way to estimate Mohawk’s value
is with an earnings or EBITDA multiple comparable to other
companies in its industry. We estimate an EBITDA multiple of
11.45x by putting a 10x multiple on the Carpet and Corporate
Expense segments and a 12x multiple on Tile and Laminate &
Wood. The 12x multiple accounts for the high margin business
of those segments versus the carpet segment. We put a 26x P/E
multiple on net income which is the industry average for home
furnishers.
1/23/14
P/E
EV/EBITDA
DCF
For our comparable analysis we used Armstrong World
$50
$150
$250
$350
Industries (AWI), Interface (TILE), and Masco Corporation
Value
per
Share
(MAS) as our primary competitors. AWI is weighted at 50%
due to the company’s similar exposure to a recovering housing
market for residential and commercial applications in the floor
covering space, specifically hardwoods. TILE is weighted at 30% due to its exposure to carpets and its similar multiples. MAS is weighted at
20% due to the company’s similar leverage in recovering housing volume and its similar enterprise value. Although we use these companies
for our comparable analysis, there is no direct competitor with similar market share, distribution capabilities and exposure to multiple
economies throughout the world to closely compare MHK’s business. Shaw Industries would be the closest competitor with a 21% market
share, but is privately owned and therefore unavailable for direct comparison. For a more detailed comparable company analysis, see
appendix Figure 24.
Financial Analysis
Revenue: Mohawk Industries saw a 25% increase in revenue growth year-over-year for the nine months ended September 30, 2013. This
can be attributed to its recent acquisitions as well as a recovering housing market. Over the past five years there has been relatively spotty,
stagnant growth but that has begun to change towards the end of 2013. Following acquisitions, upward price revisions, and a strong year for
the overall economy, each of Mohawk’s segments has performed well and in a way we expect to continue into the future. We are forecasting
overall revenue growth of 37% for 2013 and 5% for 2014.
Carpet sales grew 3% year-over-year in the third quarter of 2013 and were essentially flat from 2011 to 2012. The carpet industry, which is
mostly in North America, is relatively saturated so we don’t expect Mohawk to gain market share in the U.S. We do expect steady growth as
the housing industry rebounds and remodels increase.
Ceramics grew an astounding 84% in Q3 over last year. This is attributed to a strong domestic market as well as a strong performance from
the legacy Dal-Tile business and the Marazzi acquisition. Internationally, sales outpaced the market as Mohawk gained share in Russia and
Eastern Europe. This is attributed to new products and a strong construction market in Russia. A 200-400 basis point price increase was also
implemented to offset increased costs.
Laminate & Wood has a similar story to Ceramics with a 37% increase over last year, which was largely attributed to the acquisitions of
Pergo and Spano along with high domestic growth.
Gross Margin: In 2012 Mohawk saw an approximately 60 basis point increase in its gross margin to 25.7% which can be attributed to
higher volumes and a better overall product mix. We expect to see another 50-100 basis point improvement as product mix shifts towards
higher end products.
Operating Margin: Even in the distressed environment following the recession, MHK generated operating margins of 5%-6%. In 2010,
2011 and 2012 MHK’s operating margins were 5.9%, 5.6% and 6.5% respectively. But going into the second half of 2013 the company saw
a 250 basis point increase to a healthy 9% for the third quarter. We expect to see another 100 to 200 basis point improvement over the next
few years as Mohawk increases operational efficiencies and fully integrates its recent acquisitions. We forecast Mohawk’s operating margin
to improve to 8.22% in 2014.
Tax: Taxes have been relatively unstable given Mohawks limited profitability following the U.S. housing crisis but we believe the 18% tax
rate in 2012 serves as a reasonable estimate of what to expect the company to pay in the future.
Net Profit Margin: Ending 2012 Mohawk had a net profit margin of 4.33% versus 3.16% in 2011. Following our assumptions of increasing
gross and operating margins, we see a 100-200 basis point improvement in the net profit margin to 5.66% in 2014.
EPS: MHK’s EPS rebounded in 2012 to $3.61 after seeing negative earnings in the 2008-2009 period and falling in 2011 to $2.52 from
$2.70 in 2010. With the increase in revenues and net profit margin along with integration of its three recent acquisitions, we forecast 2013
EPS to increase 69% to $6.09 and 2014 EPS to increase 11% to $6.77. Our earnings forecast represents between a 10% CAGR for our base
case and a 17% CAGR for our bull case from 2013 to 2017.
Balance Sheet Items: Although Mohawk took on nearly $1 billion in new debt to fund its three recent acquisitions its balance sheet is still
in a pretty healthy condition. Mohawk’s current ratio declined from 3.08 in 2012 to 2.3 in Q3 2013. Debt to EBITDA is approximately 2.3x
and EBITDA coverage was 11.4x for the third quarter of 2013.
9
Recommendation: Buy
1/23/14
Other Considerations
Catalysts
Near-term catalysts include monthly existing single-family home sales, new home sales, housing starts, and unemployment data. Mohawk
Industries will release its fourth quarter 2013 earnings on Thursday, February 20, 2014 with its conference call broadcasting on Friday,
February 21, 2014 at 11:00 am ET.
The effect of rising rates on new home demand, the sustainability of job growth and the upcoming spring selling season are among key focal
points in U.S. homebuilding. Higher rates and lower affordability have led to a pause in buyer demand for new homes in recent months. Job
growth is perhaps the single most important driver for a more robust housing recovery, which is correlated with Mohawk’s business as the
health of the housing market has the most direct impact on its growth. Though recent improvements are a positive indicator for housing,
employment remains about 1% below its prerecession peak. The economy will need to sustain strong employment growth throughout 2014
to help fuel housing demand. The upcoming spring selling season will provide investors with the next meaningful view into new home
demand and the demand trajectory for 2014.
Credit Rating
Moody’s upgraded Mohawk Industries to an investment grade rating of Baa3 on December 18, 2013. The reason for the upgrade was due to
the company’s leading market share in floor covering products, strong cash flows, and good diversification throughout the U.S. and in
China, Europe, Mexico and Russia. With a stable outlook, Moody’s now expects revenue to continue to grow due to the improvement in the
housing market, modest economic expansion, strength in consumer spending patterns, and demand expansion in both the commercial and
residential markets.
Major Shareholders
The top ten institutional holders combine to own 31.63% of the outstanding shares. The majority of the top institutional holders who own
shares in Mohawk Industries manage an index fund or a growth-oriented portfolio. Blackrock Fund Advisors and the Vanguard Group, Inc.
own 4.76% and 4.46% of the shares outstanding respectively and are both index funds. Ruane, Cunniff & Goldfarb, Inc. manages an
aggressive growth portfolio and owns 4.03% of the outstanding shares. JPMorgan Investment Management, Inc. manages a growth-oriented
portfolio and currently owns 3.85% of the outstanding shares.
Investment Risks
Operation Risk: Higher than expected material inflation
Mohawk Industries has instituted a two to four percent price increase across the board to offset expected inflation on the price of input
materials, energy costs, and transportation costs. The primary input materials used by Mohawk are nylon, polypropylene, polyester, wool
resins and fibers, synthetic backing materials, latex and various dyes and chemicals, all of which are petroleum based. Petrochemicals are
crucial ingredients in resin production. Since petrochemicals account for between two-thirds and three-fourths of the variable costs in
production, rising oil costs pressure Mohawks margins especially if they are higher than the three to four percent price increase can cover.
Economic Risk: Macroeconomic European and Russia issues
European sales account for approximately 25% of Mohawk Industries total sales versus approximately 13% for its peers. The increased
exposure to the European economy is a large risk to both top and bottom line growth for Mohawk as recovery of the European economy has
been slow and at times non-existent. The legacy business in Europe for Mohawk was actually down four percent in 2012 while the legacy
business overall was flat due to the gains from the United States being canceled out by losses in Europe. Also the Russian economy is
slowing and the ceramic segment is expected to slow but still outpace the economy as a whole.
Economic Risk: Lower than expected home remodeling uptick
The top line and bottom line growth for the United States segment of Mohawk was mainly due to increased volume not increased margin,
therefore future top and bottom line growth will be more predicated on increased demand from home remodeling than by increased margins.
However, Mohawk’s exposure to U.S. home remodeling is estimated at around 9% versus around 13% for its peers, therefore increases in
home remodeling will positively affect Mohawk’s peers more than itself. However, Mohawk is projecting an uptick in home remodeling
activity; therefore a lower than expected increase will negatively affect future projected growth in the United States.
Market Risk: Greater than expected currency changes
Mohawk Industries has instituted between a four to eight percent price increase in both Russia and Australia to offset currency depreciation.
The Russian Ruble has depreciated from approximately 28 rubles per American dollar in 2011 to approximately 32 rubles per American
dollar in 2013. The Australian Dollar has depreciated from approximately .95 Australian dollars per American dollar in 2011 to
approximately 1.12 Australian dollars per American dollar in 2013. If the four to eight percent increase does not cover the anticipated further
depreciation, bottom line numbers will be affected due to loss on currency exchange.
10
Recommendation: Buy
1/23/14
Appendix
Figure 1: Income Statement Base Case
Figure 2: Balance Sheet
Figure 3: Projected Cash Flows Base Case
Figure 4: Carpet Base Case
Figure 5: Ceramic Base Case
Figure 6: Laminate & Wood Base Case
Figure 7: Corporate Base Case
Figure 8: Valuation Base Case
Figure 9: Income Statement Bull Case
Figure 10: Projected Cash Flows Bull Case
Figure 11: Carpet Bull Case
Figure 12: Ceramic Bull Case
Figure 13: Laminate & Wood Bull Case
Figure 14: Corporate Bull Case
Figure 15: Valuation Bull Case
Figure 16: Income Statement Bear Case
Figure 17: Projected Cash Flows Bear Case
Figure 18: Carpet Bear Case
Figure 19: Ceramic Bear Case
Figure 20: Laminate & Wood Bear Case
Figure 21: Corporate Bear Case
Figure 22: Valuation Bear Case
Figure 23: Price Target
Figure 24: Comparable Company Analysis
Figure 25: DuPont Analysis
Figure 26: Sources
11
Figure 1: Income Statement Base Case
2008
Revenue
$ 6,826,348.00 $
-Cost of Sales
5,088,584.00
Gross Profit
1,737,764.00
-SG&A
1,318,501.00
-Impairment of Goodwill and Intangible
1,543,397.00
Operating Income
(1,124,134.00)
-Other Expenses (Income)
21,288.00
-Interest Expense (Income)
127,050.00
Income before Taxes
(1,272,472.00)
-Taxes
180,062.00
Net Income
(1,452,534.00)
-Noncontrolling Interest
5,694.00
Net Income to Shareholders
$ (1,458,228.00) $
Shares Outstanding
68401
EPS
$
(21.32) $
Tax Rate
-14%
Margin Analysis: % of Revenue
Cost of Sales
Gross Profit
SG&A
Operating Income
Interest Expense (Income)
Income before Taxes
Taxes
Net Income
Noncontrolling Interest
Growth Analysis YOY
Revenue
Cost of Sales
Gross Profit
SG&A
Operating Income
Income before Taxes
Taxes
Net Income
74.54%
25.46%
19.31%
-16.47%
1.86%
-18.64%
2.64%
-21.28%
0.08%
-21.36%
2009
2010
5,344,024.00 $ 5,319,072.00 $
4,111,794.00
3,916,472.00
1,232,230.00
1,402,600.00
1,188,500.00
1,088,431.00
43,730.00
314,169.00
(5,588.00)
(11,630.00)
127,031.00
133,151.00
(77,713.00)
192,648.00
(76,694.00)
2,713.00
(1,019.00)
189,935.00
4,480.00
4,464.00
(5,499.00) $ 185,471.00 $
68452
68,784.00
(0.08) $
2.70 $
99%
1%
2011
2012
5,642,258.00 $ 5,787,980.00
4,225,379.00
4,297,922.00
1,416,879.00
1,490,058.00
1,101,337.00
1,110,550.00
315,542.00
379,508.00
14,051.00
303.00
101,617.00
74,713.00
199,874.00
304,492.00
21,649.00
53,599.00
178,225.00
250,893.00
4,303.00
635.00
173,922.00 $ 250,258.00
68,964.00
69,306.00
2.52 $
3.61
11%
18%
2013
2014
2015
2016
$ 7,906,815.45 $ 8,290,805.35 $ 8,698,818.86 $ 9,133,759.80 $
5,845,173.92
6,108,206.75
6,383,076.05
6,670,314.47
2,061,641.53
2,182,598.60
2,315,742.81
2,463,445.33
1,443,715.00
1,501,463.60
1,561,522.14
1,623,983.03
$
$
2017 Past CAGR
9,543,034.57
-4%
6,970,478.62
-4%
2,572,555.94
-4%
1,688,942.35
-4%
617,926.53
681,135.00
754,220.67
839,462.30
883,613.59
89,655.60
528,270.93
105,654.19
422,616.74
666.75
421,949.99 $
69306
6.09 $
20%
94,138.38
586,996.62
117,399.32
469,597.30
700.09
468,897.21 $
69306
6.77 $
20%
98,845.30
655,375.37
131,075.07
524,300.30
735.09
523,565.20 $
69306
7.55 $
20%
103,787.56
735,674.74
147,134.95
588,539.79
771.85
587,767.94 $
69306
8.48 $
20%
108,976.94
774,636.65
154,927.33
619,709.32
810.44
618,898.88
69306
8.93
20%
76.94%
23.06%
22.24%
0.82%
2.38%
-1.45%
-1.44%
-0.02%
0.08%
-0.10%
73.63%
26.37%
20.46%
5.91%
2.50%
3.62%
0.05%
3.57%
0.08%
3.49%
74.89%
25.11%
19.52%
5.59%
1.80%
3.54%
0.38%
3.16%
0.08%
3.08%
74.26%
25.74%
19.19%
6.56%
1.29%
5.26%
0.93%
4.33%
0.01%
4.32%
73.93%
26.07%
18.26%
7.82%
1.13%
6.68%
1.34%
5.34%
0.01%
5.34%
73.67%
26.33%
18.11%
8.22%
1.14%
7.08%
1.42%
5.66%
0.01%
5.66%
73.38%
26.62%
17.95%
8.67%
1.14%
7.53%
1.51%
6.03%
0.01%
6.02%
73.03%
26.97%
17.78%
9.19%
1.14%
8.05%
1.61%
6.44%
0.01%
6.44%
73.04%
26.96%
17.70%
9.26%
1.14%
8.12%
1.62%
6.49%
0.01%
6.49%
-21.71%
-19.20%
-29.09%
-9.86%
-103.89%
-0.01%
-93.89%
-142.59%
-99.93%
-21.32%
-99.62%
-0.47%
-4.75%
13.83%
-8.42%
618.43%
4.82%
-347.90%
-103.54%
-18739.35%
-0.36%
-3472.81%
6.08%
7.89%
1.02%
1.19%
0.44%
-23.68%
3.75%
697.97%
-6.17%
-3.61%
-6.23%
2.58%
1.72%
5.16%
0.84%
20.27%
-26.48%
52.34%
147.58%
40.77%
-85.24%
43.89%
36.61%
36.00%
38.36%
30.00%
62.82%
20.00%
73.49%
97.12%
68.45%
5.00%
68.61%
4.86%
4.50%
5.87%
4.00%
10.23%
5.00%
11.12%
11.12%
11.12%
5.00%
11.13%
4.92%
4.50%
6.10%
4.00%
10.73%
5.00%
11.65%
11.65%
11.65%
5.00%
11.66%
5.00%
4.50%
6.38%
4.00%
11.30%
5.00%
12.25%
12.25%
12.25%
5.00%
12.26%
4.48%
4.50%
4.43%
4.00%
5.26%
5.00%
5.30%
5.30%
5.30%
5.00%
5.30%
Future CAGR
5%
5%
6%
4%
9%
-12%
-26%
-42%
5%
10%
10%
10%
5%
10%
10%
Figure 2: Balance Sheet
2007
Assets
Current Assets
Cash & Equivalents
Receivables
Inventories
Prepaid Expenses
Deferred Income Taxes
Other Current Assets
Total Current Assets
Property Plant & Equipment
Goodwill
Tradenames
Other Intangible Assets
Deferred Income Taxes and
Other Non-Current Assets
Total Assets
Liabilities & Stockholder's Equity
Curren Liabilities
Current Portion of Longterm Debt
Accounts Payable and Accrued
Expenses
Total Current Liabilities
Deferred Income Taxes
Longterm Debt, Less current
Other Longterm Liabilities
Total Liabilities
Commitments and Contingencies
Redeemable Noncontrolling
Interest
Stockholder's Equity
Common Stock
Additional paid in capital
Retained Earnings
Accumulated other
Comprehensive Income
-Treasury Stock
Total Stockholder's Equity
Total Liabilities and Stockholder's
Equity
2008
89604
821113
1276568
123395
139040
93519
696284
1168272
125603
162571
2,449,720.00
1975721
2797339
707086
464783
285401
8,680,050.00
2009
2010
2011
2012
2,246,249.00
1925742
1399434
472399
375451
531,458.00
673,931.00
892,981.00
108,947.00
130,990.00
20,693.00
2,359,000.00
1,791,412.00
1,411,128.00
477,607.00
307,735.00
354,217.00
614,473.00
1,007,503.00
91,731.00
133,304.00
47,385.00
2,248,613.00
1,687,124.00
1,369,394.00
456,890.00
220,237.00
311,945.00
686,165.00
1,113,630.00
112,779.00
150,910.00
22,735.00
2,398,164.00
1,712,154.00
1,375,175.00
450,432.00
154,668.00
477,672.00
679,473.00
1,133,736.00
138,117.00
111,585.00
9,463.00
2,550,046.00
1,692,852.00
1,385,771.00
455,503.00
98,296.00
26900
6,446,175.00
44,564.00
6,391,446.00
116,668.00
6,098,926.00
115,635.00
6,206,228.00
121,216.00
6,303,684.00
260439
94785
52,907.00
350,588.00
386,255.00
55,213.00
951061
1,211,500.00
614619
2021395
125179
3,972,693.00
782131
876,916.00
419985
1860001
135470
3,292,372.00
831,115.00
884,022.00
370,903.00
1,801,572.00
100,667.00
3,157,164.00
698,326.00
1,048,914.00
346,503.00
1,302,994.00
93,518.00
2,791,929.00
715,091.00
1,101,346.00
355,653.00
1,200,184.00
99,537.00
2,756,720.00
773,436.00
828,649.00
329,810.00
1,327,729.00
97,879.00
2,584,067.00
Total Assets
-Goodwill
-Tradenames
-Other Intangible Assets
Tangible Assets
Net income
Return on Tangible Assets
Current Ratio
35,441.00
33,723.00
795
1217903
2004115
795.00
1,227,856.00
1,998,616.00
797.00
1,235,445.00
2,180,843.00
798.00
1,248,131.00
2,354,765.00
802.00
1,277,521.00
2,605,023.00
363981
323718
4,707,357.00
254535
323545
3,153,803.00
296,917.00
323,361.00
3,200,823.00
178,097.00
323,626.00
3,271,556.00
135,639.00
323,548.00
3,415,785.00
159,733.00
323,462.00
3,719,617.00
8,680,050.00
6,446,175.00
6,391,446.00
6,098,926.00
6,206,228.00
6,303,684.00
2009
6,391,446.00
1,411,128.00
477,607.00
307,735.00
4,194,976.00
(1,019.00)
0.0%
2010
6,098,926.00
1,369,394.00
456,890.00
220,237.00
4,052,405.00
189,935.00
4.7%
2011
6,206,228.00
1,375,175.00
450,432.00
154,668.00
4,225,953.00
178,225.00
4.2%
2012
6,303,684.00
1,385,771.00
455,503.00
98,296.00
4,364,114.00
250,893.00
5.7%
2.022
2.562
2.668
2.144
2.177
3.077
2,021,395.00
260,439.00
89,604.00
1,860,001.00
94,785.00
93,519.00
1,801,572.00
52,907.00
531,458.00
1,302,994.00
350,588.00
354,217.00
1,200,184.00
386,255.00
311,945.00
1,327,729.00
55,213.00
477,672.00
Net Debt
2,192,230.00
1,861,267.00
1,323,021.00
1,299,365.00
1,274,494.00
905,270.00
Total Assets
-Excess Cash
-Non Interest Bearing
Current Liabilities
8,680,050.00
6,446,175.00
6,391,446.00
6,098,926.00
6,206,228.00
6,303,684.00
951061
782131
831115
698326
715091
773436
Invested Capital
NOPAT
ROIC
7,728,989.00
5,664,044.00
(1,304,196.00)
-23.0%
5,560,331.00
120,424.00
2.2%
5,400,600.00
311,456.00
5.8%
5,491,137.00
293,893.00
5.4%
5,530,248.00
325,909.00
5.9%
2281834
1954786
127,050.00
1854479
127,031.00
1653582
133,151.00
1586439
101,617.00
1382942
74,713.00
44,303.40
623,913.66
596,906.62
Debt
Interest
Debt/EBITDA
EBITDA/Interest
794
1203957
3462343
2008
6,446,175.00
1,399,434.00
472,399.00
375,451.00
4,198,891.00
(1,452,534.00)
-34.6%
Longterm Debt
Shortterm Debt
-Cash
EBITDA
33,459.00
2007
8,680,050.00
2,797,339.00
707,086.00
464,783.00
4,710,842.00
(2,407,339.33)
(0.81)
-18.95
41.86
0.35
2.65
4.69
2.66
5.87
692,212.11
2.00
9.26
Figure 3: Projected Cash Flows Base Case
EBIT
EBIT(1-T)
+Depreciation & Amortization
-Working Capital
Operating Cash Flow
-Capital Expense
Free Cash Flow
FCF Conversion
D&A/CapEX
Tax
2008
(1,124,134.00)
(1,283,205.33)
295,054.00
76,781.00
(1,064,932.33)
217,824.00
(1,282,756.33)
1.14
(5.89)
-14%
2009
43,730.00
573.40
303,004.00
321,911.00
(18,333.60)
108,925.00
(127,258.60)
(2.91)
0.01
99%
2010
314,169.00
309,744.66
296,773.00
(167,485.00)
774,002.66
156,180.00
617,822.66
1.97
1.98
1%
2011
315,542.00
281,364.62
297,734.00
(202,304.00)
781,402.62
275,573.00
505,829.62
1.60
1.02
11%
2012
379,508.00
312,704.11
280,293.00
9,939.00
583,058.11
208,294.00
374,764.11
0.99
1.50
18%
2013
709,504.60
567,603.68
406,768.55
100,000.00
874,372.23
500,000.00
374,372.23
0.53
1.14
20%
2014
858,886.75
687,109.40
427,812.35
100,000.00
1,014,921.75
450,000.00
564,921.75
0.66
1.53
20%
2015
943,748.21
754,998.57
449,513.33
100,000.00
1,104,511.90
400,000.00
704,511.90
0.75
1.89
20%
2016
990,935.62
792,748.50
471,989.00
100,000.00
1,164,737.49
350,000.00
814,737.49
0.82
2.26
20%
2017
1,040,482.40
832,385.92
495,588.45
100,000.00
1,227,974.37
350,000.00
877,974.37
0.84
2.38
20%
Figure 4: Carpet Base Case
Net Sales
Operating Income
Depreciation & Amortization
EBITDA
-Capital Expenditures
Free Cash Flow
2008
3,628,183.00
(216,152.00)
92,130.00
(124,022.00)
78,239.00
(202,261.00)
2009
2,856,741.00
(125,965.00)
94,134.00
(31,831.00)
35,149.00
(66,980.00)
2010
2,844,876.00
122,904.00
91,930.00
214,834.00
84,013.00
130,821.00
2011
2,927,674.00
109,874.00
90,463.00
200,337.00
125,630.00
74,707.00
2012
2,912,055.00
158,196.00
95,648.00
253,844.00
97,972.00
155,872.00
Assets
ROA
1,876,696.00
-11.52%
1,582,652.00
-7.96%
1,637,319.00
7.51%
1,769,065.00
6.21%
1,721,214.00
9.19%
-5.96%
2.54%
-3.42%
2.16%
-4.41%
3.30%
-1.11%
1.23%
4.32%
3.23%
7.55%
2.95%
3.75%
3.09%
6.84%
4.29%
-21.26%
-41.72%
2.18%
-74.33%
-55.07%
-0.42%
-197.57%
-2.34%
-774.92%
139.02%
2.91%
-10.60%
-1.60%
-6.75%
49.54%
Margin Analysis
Operating Income
EBITDA
Capital Expenditures
Growth Analysis
Net Sales
Operating Income
EBITDA
2013
3,057,657.75
213,564.60
100,430.40
313,995.00
107,769.20
206,225.80
2014
3,210,540.64
266,955.75
105,451.92
372,407.67
118,546.12
253,861.55
2015
3,371,067.67
306,999.11
110,724.52
417,723.63
130,400.73
287,322.90
2016
3,539,621.05
322,349.07
116,260.74
438,609.81
136,920.77
301,689.04
2017 Past CAGR Future CAGR
3,716,602.11
-5%
5%
338,466.52
12%
122,073.78
1%
5%
460,540.30
10%
143,766.81
6%
7%
316,773.49
5.43%
3.28%
8.72%
3.36%
6.98%
3.28%
10.27%
3.52%
8.31%
3.28%
11.60%
3.69%
9.11%
3.28%
12.39%
3.87%
9.11%
3.28%
12.39%
3.87%
9.11%
3.28%
12.39%
3.87%
-0.53%
43.98%
5.73%
26.71%
-22.02%
5%
35%
5%
5%
10%
5%
25%
5%
5%
10%
5%
15%
5%
5%
10%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
Figure 5: Ceramic Base Case
Net Sales
Operating Income
EBITDA
Free Cash Flow
2008
1,815,373.00
(323,370.00)
46,093.00
(277,277.00)
41,616.00
(318,893.00)
2009
1,426,757.00
84,154.00
47,934.00
132,088.00
17,683.00
114,405.00
2010
1,367,442.00
97,334.00
45,578.00
142,912.00
37,344.00
105,568.00
2011
1,454,316.00
101,298.00
42,723.00
144,021.00
66,419.00
77,602.00
2012
1,616,383.00
120,951.00
41,176.00
162,127.00
49,426.00
112,701.00
Assets
ROA
1,693,765.00
-19.09%
1,546,393.00
5.44%
1,644,448.00
5.92%
1,732,818.00
5.85%
1,731,258.00
6.99%
-17.81%
2.54%
-15.27%
2.29%
5.90%
3.36%
9.26%
1.24%
7.12%
3.33%
10.45%
2.73%
6.97%
2.94%
9.90%
4.57%
7.48%
2.55%
10.03%
3.06%
-21.41%
-126.02%
3.99%
-147.64%
-57.51%
-4.16%
15.66%
-4.92%
8.19%
111.19%
6.35%
4.07%
-6.26%
0.78%
77.86%
11.14%
19.40%
-3.62%
12.57%
-25.58%
Margin Analysis
Operating Income
EBITDA
Growth Analysis
Net Sales
Operating Income
EBITDA
Proforma
2,776,000.00
250,000.00
83,280.00
333,280.00
111,040.00
222,240.00
9.01%
3.00%
12.01%
4.00%
2013
2,914,800.00
312,500.00
87,444.00
399,944.00
117,702.40
282,241.60
2014
3,060,540.00
359,375.00
91,816.20
451,191.20
124,764.54
326,426.66
2015
3,213,567.00
380,937.50
96,407.01
477,344.51
131,002.77
346,341.74
2016
3,374,245.35
399,984.38
101,227.36
501,211.74
137,552.91
363,658.83
3,542,957.62
-3%
5%
419,983.59
8%
106,288.73
-3%
5%
526,272.32
7%
144,430.56
4%
5%
381,841.77
10.72%
3.00%
13.72%
4.04%
11.74%
3.00%
14.74%
4.08%
11.85%
3.00%
14.85%
4.08%
11.85%
3.00%
14.85%
4.08%
11.85%
3.00%
14.85%
4.08%
5%
25%
5%
5%
6%
5%
15%
5%
5%
6%
5%
6%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
Figure 6: Laminate & Wood Base Case
Net Sales
Operating Income
EBITDA
Free Cash Flow
2008
1,465,208.00
(564,911.00)
149,543.00
(415,368.00)
90,500.00
(505,868.00)
2009
1,128,315.00
105,953.00
151,450.00
257,403.00
45,966.00
211,437.00
2010
1,188,274.00
114,298.00
145,941.00
260,239.00
29,439.00
230,800.00
2011
1,344,764.00
127,147.00
151,884.00
279,031.00
78,615.00
200,416.00
2012
1,350,349.00
126,409.00
132,183.00
258,592.00
56,605.00
201,987.00
Assets
ROA
2,663,599.00
-21.21%
2,598,182.00
4.08%
2,475,049.00
4.62%
2,533,070.00
5.02%
2,672,389.00
4.73%
-38.56%
10.21%
-28.35%
6.18%
9.39%
13.42%
22.81%
4.07%
9.62%
12.28%
21.90%
2.48%
9.45%
11.29%
20.75%
5.85%
9.36%
9.79%
19.15%
4.19%
-22.99%
-118.76%
1.28%
-161.97%
-49.21%
5.31%
7.88%
-3.64%
1.10%
-35.95%
13.17%
11.24%
4.07%
7.22%
167.04%
0.42%
-0.58%
-12.97%
-7.32%
-28.00%
Margin Analysis
Operating Income
EBITDA
Growth Analysis
Net Sales
Operating Income
EBITDA
Proforma
1,950,349.00
160,000.00
195,034.90
355,034.90
97,517.45
257,517.45
8.20%
10.00%
18.20%
5.00%
2013
2,047,866.45
216,000.00
204,786.65
420,786.65
102,393.32
318,393.32
2014
2,150,259.77
270,000.00
215,025.98
485,025.98
107,512.99
377,512.99
2015
2,257,772.76
297,000.00
225,777.28
522,777.28
112,888.64
409,888.64
2016
2,370,661.40
311,850.00
237,066.14
548,916.14
118,533.07
430,383.07
2,441,781.24
-2%
4%
327,442.50
11%
248,919.45
-3%
5%
576,361.95
8%
124,459.72
-11%
5%
451,902.22
10.55%
10.00%
20.55%
5.00%
12.56%
10.00%
22.56%
5.00%
13.15%
10.00%
23.15%
5.00%
13.15%
10.00%
23.15%
5.00%
13.41%
10.19%
23.60%
5.10%
5%
35%
5%
5%
5%
5%
25%
5%
5%
5%
5%
10%
5%
5%
5%
5%
5%
5%
5%
5%
3%
5%
5%
5%
5%
Figure 7: Corporate Base Case
Net Sales
Operating Income
EBITDA
Free Cash Flow
2008
(82,416.00)
(19,701.00)
7,288.00
(12,413.00)
7,469.00
(19,882.00)
Assets
ROA
212,115.00 664,219.00 342,110.00 171,275.00 178,823.00
-9.29%
-3.07%
-5.95%
-13.30%
-14.57%
Margin Analysis
Operating Income
EBITDA
Growth Analysis
Net Sales
Operating Income
EBITDA
23.90%
-8.84%
15.06%
-9.06%
2009
(67,789.00)
(20,412.00)
9,486.00
(10,926.00)
10,127.00
(21,053.00)
2010
(81,520.00)
(20,367.00)
13,324.00
(7,043.00)
5,384.00
(12,427.00)
2011
(84,496.00)
(22,777.00)
12,664.00
(10,113.00)
4,909.00
(15,022.00)
2012
(90,807.00)
(26,048.00)
11,286.00
(14,762.00)
4,291.00
(19,053.00)
2013
(113,508.75)
(32,560.00)
14,107.50
(18,452.50)
4,505.55
(22,958.05)
2014
(130,535.06)
(37,444.00)
15,518.25
(21,925.75)
4,730.83
(26,656.58)
2015
(143,588.57)
(41,188.40)
16,604.53
(24,583.87)
4,967.37
(29,551.24)
2016
(150,768.00)
(43,247.82)
17,434.75
(25,813.07)
5,215.74
(31,028.80)
(158,306.40)
2%
9%
(45,410.21)
7%
9%
18,306.49
12%
7%
(27,103.72)
4%
10%
5,476.52
-13%
5%
(32,580.24)
30.11%
-13.99%
16.12%
-14.94%
24.98%
-16.34%
8.64%
-6.60%
26.96%
-14.99%
11.97%
-5.81%
28.69%
-12.43%
16.26%
-4.73%
28.69%
-12.43%
16.26%
-3.97%
28.69%
-11.89%
16.80%
-3.62%
28.69%
-11.56%
17.12%
-3.46%
28.69%
-11.56%
17.12%
-3.46%
28.69%
-11.56%
17.12%
-3.46%
-17.75%
3.61%
30.16%
-11.98%
35.59%
20.26%
-0.22%
40.46%
-35.54%
-46.84%
3.65%
11.83%
-4.95%
43.59%
-8.82%
7.47%
14.36%
-10.88%
45.97%
-12.59%
25%
25%
25%
5%
5%
15%
15%
10%
5%
5%
10%
10%
7%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
Figure 8: Valuation Base Case
Shares Outstanding
Warrants
RSU
Converts
ITM Options
Strike Price
Net new shares
Diluted shares outstanding
Book Value of Debt
Market Value of Equity
Cost of Debt
Risk Free Rate
Market Risk Premium
Beta
Cost of Equity
Tax Rate
WACC
Multiple Valuation
$ 12,914,257.24 WACC
2,257,391.00 g
89,031.00
63,580.00
2,282,842.00
10,631,415.24
73,737.64
$
144.18
$
146.75
8.73%
3.00%
Segment
Carpet
Ceramic
Laminate/Wood
Corp
Total
Longterm Debt
Shortterm Debt
-Cash
-Net Debt (Cash)
Equity Value
Shares Outstanding
Value per Share
72,625.00
605.00
995.00
74.87
507.64
73,737.64
2,346,422.00
10,820,998.15
5.22%
3.00%
8.00%
1.38
9.89%
35.00%
8.73%
Mohawk
Shares Outstanding
Value Per Share
$
Terminal Rate
DCF Valuation
Enterprise Value
Longterm Debt
Shortterm Debt
-Cash
-Net Debt (Cash)
Equity Value
Shares Outstanding
Value per Share
Current Price
EBITDA
2013
2014 Multiple
313,995.00
372,407.67 10.00x
399,944.00
451,191.20 12.00x
420,786.65
485,025.98 12.00x
(18,452.50)
(21,925.75) 10.00x
$ 1,118,286.15 $ 1,288,713.10 11.45x
$
144.18
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
Net Income
421,949.99 $ 468,897.21
7.73%
138.09
150.47
165.22
183.09
205.18
233.19
269.88
26.00x
Sensitivity Analysis
WACC
8.23%
8.73%
113.36
124.80
135.15
122.11
147.30
132.27
161.78
144.21
179.32
158.42
201.01
175.64
228.51
196.93
Enterprise Value
2013
2014
3,139,950.00
3,724,076.70
4,799,328.00
5,414,294.40
5,049,439.74
5,820,311.73
(184,525.00)
(219,257.50)
$ 12,806,205.74 $ 14,741,439.33
2,257,391.00
2,257,391.00
89,031.00
89,031.00
63,580.00
63,580.00
2,282,842.00
2,282,842.00
10,523,363.74
12,458,597.33
73,737.64
73,737.64
$
142.71 $
168.96
Equity Value
$ 10,970,699.84 $ 12,191,327.44
73,737.64
73,737.64
$
148.78 $
165.33
9.23%
103.41
110.89
119.49
129.46
141.18
155.13
172.04
9.73%
94.67
101.13
108.48
116.92
126.71
138.21
151.92
Figure 9: Income Statement Bull Case
Revenue
$
-Cost of Sales
Gross Profit
-SG&A
-Impairment of Goodwill and Intan
Operating Income
Income before Taxes
-Taxes
Net Income
$
Shares Outstanding
EPS
$
Tax Rate
Cost of Sales
Gross Profit
SG&A
Operating Income
Income before Taxes
Taxes
Net Income
Growth Analysis YOY
Revenue
Cost of Sales
Gross Profit
SG&A
Operating Income
Income before Taxes
Taxes
Net Income
2008
2009
2010
2011
2012
6,826,348.00 $ 5,344,024.00 $ 5,319,072.00 $ 5,642,258.00 $ 5,787,980.00
5,088,584.00
4,111,794.00
3,916,472.00
4,225,379.00
4,297,922.00
1,737,764.00
1,232,230.00
1,402,600.00
1,416,879.00
1,490,058.00
1,318,501.00
1,188,500.00
1,088,431.00
1,101,337.00
1,110,550.00
1,543,397.00
(1,124,134.00)
43,730.00
314,169.00
315,542.00
379,508.00
21,288.00
(5,588.00)
(11,630.00)
14,051.00
303.00
127,050.00
127,031.00
133,151.00
101,617.00
74,713.00
(1,272,472.00)
(77,713.00)
192,648.00
199,874.00
304,492.00
180,062.00
(76,694.00)
2,713.00
21,649.00
53,599.00
(1,452,534.00)
(1,019.00)
189,935.00
178,225.00
250,893.00
5,694.00
4,480.00
4,464.00
4,303.00
635.00
(1,458,228.00) $
(5,499.00) $ 185,471.00 $ 173,922.00 $ 250,258.00
68401
68452
68,784.00
68,964.00
69,306.00
(21.32) $
(0.08) $
2.70 $
2.52 $
3.61
-14%
99%
1%
11%
18%
74.54%
25.46%
19.31%
-16.47%
1.86%
-18.64%
2.64%
-21.28%
0.08%
-21.36%
2013
2014
2015
2016
2017 Past CAGR
$ 8,230,494.55 $ 8,838,187.43 $ 9,395,782.12 $ 9,900,858.63 $ 10,344,324.81
-4%
5,845,173.92
6,108,206.75
6,383,076.05
6,670,314.47
6,970,478.62
-4%
2,385,320.63
2,729,980.69
3,012,706.07
3,230,544.16
3,373,846.19
-4%
1,443,715.00
1,501,463.60
1,561,522.14
1,623,983.03
1,688,942.35
-4%
941,605.63
1,228,517.09
1,451,183.93
1,606,561.13
1,684,903.84
89,655.60
94,138.38
98,845.30
103,787.56
108,976.94
851,950.03
1,134,378.71
1,352,338.63
1,502,773.56
1,575,926.90
170,390.01
226,875.74
270,467.73
300,554.71
315,185.38
681,560.02
907,502.96
1,081,870.90
1,202,218.85
1,260,741.52
666.75
700.09
735.09
771.85
810.44
$ 680,893.27 $ 906,802.88 $ 1,081,135.81 $ 1,201,447.00 $ 1,259,931.08
69306
69306
69306
69306
69306
$
9.82 $
13.08 $
15.60 $
17.34 $
18.18
20%
20%
20%
20%
20%
76.94%
23.06%
22.24%
0.82%
2.38%
-1.45%
-1.44%
-0.02%
0.08%
-0.10%
73.63%
26.37%
20.46%
5.91%
2.50%
3.62%
0.05%
3.57%
0.08%
3.49%
74.89%
25.11%
19.52%
5.59%
1.80%
3.54%
0.38%
3.16%
0.08%
3.08%
74.26%
25.74%
19.19%
6.56%
1.29%
5.26%
0.93%
4.33%
0.01%
4.32%
71.02%
28.98%
17.54%
11.44%
1.09%
10.35%
2.07%
8.28%
0.01%
8.27%
69.11%
30.89%
16.99%
13.90%
1.07%
12.83%
2.57%
10.27%
0.01%
10.26%
67.94%
32.06%
16.62%
15.45%
1.05%
14.39%
2.88%
11.51%
0.01%
11.51%
67.37%
32.63%
16.40%
16.23%
1.05%
15.18%
3.04%
12.14%
0.01%
12.13%
67.38%
32.62%
16.33%
16.29%
1.05%
15.23%
3.05%
12.19%
0.01%
12.18%
-21.71%
-19.20%
-29.09%
-9.86%
-103.89%
-0.01%
-93.89%
-142.59%
-99.93%
-21.32%
-99.62%
-0.47%
-4.75%
13.83%
-8.42%
618.43%
4.82%
-347.90%
-103.54%
-18739.35%
-0.36%
-3472.81%
6.08%
7.89%
1.02%
1.19%
0.44%
-23.68%
3.75%
697.97%
-6.17%
-3.61%
-6.23%
2.58%
1.72%
5.16%
0.84%
20.27%
-26.48%
52.34%
147.58%
40.77%
-85.24%
43.89%
42.20%
36.00%
60.08%
30.00%
148.11%
20.00%
179.79%
217.90%
171.65%
5.00%
172.08%
7.38%
4.50%
14.45%
4.00%
30.47%
5.00%
33.15%
33.15%
33.15%
5.00%
33.18%
6.31%
4.50%
10.36%
4.00%
18.12%
5.00%
19.21%
19.21%
19.21%
5.00%
19.23%
5.38%
4.50%
7.23%
4.00%
10.71%
5.00%
11.12%
11.12%
11.12%
5.00%
11.13%
4.48%
4.50%
4.44%
4.00%
4.88%
5.00%
4.87%
4.87%
4.87%
5.00%
4.87%
Future CAGR
6%
5%
9%
4%
16%
-12%
-26%
-42%
5%
17%
17%
17%
5%
17%
17%
Figure 10: Projected Cash Flows Bull Case
EBIT
EBIT(1-T)
-Working Capital
Operating Cash Flow
-Capital Expense
Free Cash Flow
FCF Conversion
D&A/CapEX
Tax
2008
(1,124,134.00)
(1,283,205.33)
295,054.00
76,781.00
(1,064,932.33)
217,824.00
(1,282,756.33)
1.14
(5.89)
-14%
2009
43,730.00
573.40
303,004.00
321,911.00
(18,333.60)
108,925.00
(127,258.60)
(2.91)
0.01
99%
2010
314,169.00
309,744.66
296,773.00
(167,485.00)
774,002.66
156,180.00
617,822.66
1.97
1.98
1%
2011
315,542.00
281,364.62
297,734.00
(202,304.00)
781,402.62
275,573.00
505,829.62
1.60
1.02
11%
2012
379,508.00
312,704.11
280,293.00
9,939.00
583,058.11
208,294.00
374,764.11
0.99
1.50
18%
2013
899,283.00
719,426.40
406,768.55
100,000.00
1,026,194.95
500,000.00
526,194.95
0.59
1.44
20%
2014
1,058,603.75
846,883.00
427,812.35
100,000.00
1,174,695.35
450,000.00
724,695.35
0.68
1.88
20%
2015
1,147,883.05
918,306.44
449,513.33
100,000.00
1,267,819.77
400,000.00
867,819.77
0.76
2.30
20%
2016
1,219,508.45
975,606.76
471,989.00
100,000.00
1,347,595.76
350,000.00
997,595.76
0.82
2.79
20%
2017
1,280,483.88
1,024,387.10
495,588.45
100,000.00
1,419,975.55
350,000.00
1,069,975.55
0.84
2.93
20%
Figure 11: Carpet Bull Case
Net Sales
Operating Income
EBITDA
Free Cash Flow
2008
3,628,183.00
(216,152.00)
92,130.00
(124,022.00)
78,239.00
(202,261.00)
2009
2,856,741.00
(125,965.00)
94,134.00
(31,831.00)
35,149.00
(66,980.00)
2010
2,844,876.00
122,904.00
91,930.00
214,834.00
84,013.00
130,821.00
2011
2,927,674.00
109,874.00
90,463.00
200,337.00
125,630.00
74,707.00
2012
2,912,055.00
158,196.00
95,648.00
253,844.00
97,972.00
155,872.00
Assets
ROA
1,876,696.00
-11.52%
1,582,652.00
-7.96%
1,637,319.00
7.51%
1,769,065.00
6.21%
1,721,214.00
9.19%
-5.96%
2.54%
-3.42%
2.16%
-4.41%
3.30%
-1.11%
1.23%
4.32%
3.23%
7.55%
2.95%
3.75%
3.09%
6.84%
4.29%
-21.26%
-41.72%
2.18%
-74.33%
-55.07%
-0.42%
-197.57%
-2.34%
-774.92%
139.02%
2.91%
-10.60%
-1.60%
-6.75%
49.54%
Margin Analysis
Operating Income
EBITDA
Growth Analysis
Net Sales
Operating Income
EBITDA
2013
3,145,019.40
276,843.00
100,430.40
377,273.40
107,769.20
269,504.20
2014
3,365,170.76
346,053.75
105,451.92
451,505.67
118,546.12
332,959.55
2015
3,567,081.00
373,738.05
110,724.52
484,462.57
130,400.73
354,061.83
2016
3,745,435.05
392,424.95
116,260.74
508,685.69
136,920.77
371,764.93
3,932,706.81
-5%
6%
412,046.20
10%
122,073.78
1%
5%
534,119.98
9%
143,766.81
6%
7%
390,353.17
5.43%
3.28%
8.72%
3.36%
8.80%
3.19%
12.00%
3.43%
10.28%
3.13%
13.42%
3.52%
10.48%
3.10%
13.58%
3.66%
10.48%
3.10%
13.58%
3.66%
10.48%
3.10%
13.58%
3.66%
-0.53%
43.98%
5.73%
26.71%
-22.02%
8%
75%
5%
5%
10%
7%
25%
5%
5%
10%
6%
8%
5%
5%
10%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
Figure 12: Ceramic Bull Case
Net Sales
Operating Income
EBITDA
Free Cash Flow
2008
1,815,373.00
(323,370.00)
46,093.00
(277,277.00)
41,616.00
(318,893.00)
2009
1,426,757.00
84,154.00
47,934.00
132,088.00
17,683.00
114,405.00
2010
1,367,442.00
97,334.00
45,578.00
142,912.00
37,344.00
105,568.00
2011
1,454,316.00
101,298.00
42,723.00
144,021.00
66,419.00
77,602.00
2012
1,616,383.00
120,951.00
41,176.00
162,127.00
49,426.00
112,701.00
Assets
ROA
1,693,765.00
-19.09%
1,546,393.00
5.44%
1,644,448.00
5.92%
1,732,818.00
5.85%
1,731,258.00
6.99%
-17.81%
2.54%
-15.27%
2.29%
5.90%
3.36%
9.26%
1.24%
7.12%
3.33%
10.45%
2.73%
6.97%
2.94%
9.90%
4.57%
7.48%
2.55%
10.03%
3.06%
-21.41%
-126.02%
3.99%
-147.64%
-57.51%
-4.16%
15.66%
-4.92%
8.19%
111.19%
6.35%
4.07%
-6.26%
0.78%
77.86%
11.14%
19.40%
-3.62%
12.57%
-25.58%
Margin Analysis
Operating Income
EBITDA
Growth Analysis
Net Sales
Operating Income
EBITDA
Proforma
2,776,000.00
250,000.00
83,280.00
333,280.00
111,040.00
222,240.00
9.01%
3.00%
12.01%
4.00%
2013
3,053,600.00
375,000.00
87,444.00
462,444.00
117,702.40
344,741.60
2014
3,297,888.00
431,250.00
91,816.20
523,066.20
124,764.54
398,301.66
2015
3,528,740.16
474,375.00
96,407.01
570,782.01
131,002.77
439,779.24
2016
3,740,464.57
512,325.00
101,227.36
613,552.36
137,552.91
475,999.45
3,927,487.80
-3%
6%
537,941.25
9%
106,288.73
-3%
5%
644,229.98
9%
144,430.56
4%
5%
499,799.42
12.28%
2.86%
15.14%
3.85%
13.08%
2.78%
15.86%
3.78%
13.44%
2.73%
16.18%
3.71%
13.70%
2.71%
16.40%
3.68%
13.70%
2.71%
16.40%
3.68%
10%
50%
5%
5%
6%
8%
15%
5%
5%
6%
7%
10%
5%
5%
5%
6%
8%
5%
5%
5%
5%
5%
5%
5%
5%
Figure 13: Laminate & Wood Bull Case
Net Sales
Operating Income
EBITDA
Free Cash Flow
2008
1,465,208.00
(564,911.00)
149,543.00
(415,368.00)
90,500.00
(505,868.00)
2009
1,128,315.00
105,953.00
151,450.00
257,403.00
45,966.00
211,437.00
2010
1,188,274.00
114,298.00
145,941.00
260,239.00
29,439.00
230,800.00
2011
1,344,764.00
127,147.00
151,884.00
279,031.00
78,615.00
200,416.00
2012
1,350,349.00
126,409.00
132,183.00
258,592.00
56,605.00
201,987.00
Assets
ROA
2,663,599.00
-21.21%
2,598,182.00
4.08%
2,475,049.00
4.62%
2,533,070.00
5.02%
2,672,389.00
4.73%
-38.56%
10.21%
-28.35%
6.18%
9.39%
13.42%
22.81%
4.07%
9.62%
12.28%
21.90%
2.48%
9.45%
11.29%
20.75%
5.85%
9.36%
9.79%
19.15%
4.19%
-22.99%
-118.76%
1.28%
-161.97%
-49.21%
5.31%
7.88%
-3.64%
1.10%
-35.95%
13.17%
11.24%
4.07%
7.22%
167.04%
0.42%
-0.58%
-12.97%
-7.32%
-28.00%
Margin Analysis
Operating Income
EBITDA
Growth Analysis
Net Sales
Operating Income
EBITDA
Proforma
1,950,349.00
160,000.00
195,034.90
355,034.90
97,517.45
257,517.45
2013
2,145,383.90
280,000.00
204,786.65
484,786.65
102,393.32
382,393.32
2014
2,317,014.61
322,000.00
215,025.98
537,025.98
107,512.99
429,512.99
2015
2,456,035.49
344,540.00
225,777.28
570,317.28
112,888.64
457,428.64
2016
2,578,837.26
361,767.00
237,066.14
598,833.14
118,533.07
480,300.07
2,656,202.38
-2%
5%
379,855.35
8%
248,919.45
-3%
5%
628,774.80
7%
124,459.72
-11%
5%
504,315.07
8.20%
10.00%
18.20%
5.00%
13.05%
9.55%
22.60%
4.77%
13.90%
9.28%
23.18%
4.64%
14.03%
9.19%
23.22%
4.60%
14.03%
9.19%
23.22%
4.60%
14.30%
9.37%
23.67%
4.69%
10%
75%
5%
5%
5%
8%
15%
5%
5%
5%
6%
7%
5%
5%
5%
5%
5%
5%
5%
5%
3%
5%
5%
5%
5%
Figure 14: Corporate Bull Case
Net Sales
Operating Income
EBITDA
Free Cash Flow
2008
(82,416.00)
(19,701.00)
7,288.00
(12,413.00)
7,469.00
(19,882.00)
Assets
ROA
212,115.00 664,219.00 342,110.00 171,275.00 178,823.00
-9.29%
-3.07%
-5.95%
-13.30%
-14.57%
Margin Analysis
Operating Income
EBITDA
Growth Analysis
Net Sales
Operating Income
EBITDA
23.90%
-8.84%
15.06%
-9.06%
2009
(67,789.00)
(20,412.00)
9,486.00
(10,926.00)
10,127.00
(21,053.00)
2010
(81,520.00)
(20,367.00)
13,324.00
(7,043.00)
5,384.00
(12,427.00)
2011
(84,496.00)
(22,777.00)
12,664.00
(10,113.00)
4,909.00
(15,022.00)
2012
(90,807.00)
(26,048.00)
11,286.00
(14,762.00)
4,291.00
(19,053.00)
2013
(113,508.75)
(32,560.00)
14,107.50
(18,452.50)
4,505.55
(22,958.05)
2014
(141,885.94)
(40,700.00)
15,518.25
(25,181.75)
4,730.83
(29,912.58)
2015
(156,074.53)
(44,770.00)
16,604.53
(28,165.47)
4,967.37
(33,132.84)
2016
(163,878.26)
(47,008.50)
17,434.75
(29,573.75)
5,215.74
(34,789.48)
(172,072.17)
2%
11%
(49,358.93)
7%
11%
18,306.49
12%
7%
(31,052.43)
4%
14%
5,476.52
-13%
5%
(36,528.96)
30.11%
-13.99%
16.12%
-14.94%
24.98%
-16.34%
8.64%
-6.60%
26.96%
-14.99%
11.97%
-5.81%
28.69%
-12.43%
16.26%
-4.73%
28.69%
-12.43%
16.26%
-3.97%
28.69%
-10.94%
17.75%
-3.33%
28.69%
-10.64%
18.05%
-3.18%
28.69%
-10.64%
18.05%
-3.18%
28.69%
-10.64%
18.05%
-3.18%
-17.75%
3.61%
30.16%
-11.98%
35.59%
20.26%
-0.22%
40.46%
-35.54%
-46.84%
3.65%
11.83%
-4.95%
43.59%
-8.82%
7.47%
14.36%
-10.88%
45.97%
-12.59%
25%
25%
25%
5%
5%
25%
25%
10%
5%
5%
10%
10%
7%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
Figure 15: Valuation Bull Case
Shares Outstanding
Warrants
RSU
Converts
ITM Options
Strike Price
Net new shares
Book Value of Debt
Cost of Debt
Risk Free Rate
Market Risk Premium
Beta
Cost of Equity
Tax Rate
WACC
Multiple Valuation
$ 15,843,955.98 WACC
2,257,391.00 g
89,031.00
63,580.00
2,282,842.00
13,561,113.98
73,737.64
$
183.91
$
146.75
8.73%
3.00%
Segment
Carpet
Ceramic
Laminate/Wood
Corp
Total
Longterm Debt
Shortterm Debt
-Cash
-Net Debt (Cash)
Equity Value
Shares Outstanding
Value per Share
72,625.00
605.00
995.00
74.87
507.64
73,737.64
2,346,422.00
10,820,998.15
5.22%
3.00%
8.00%
1.38
9.89%
35.00%
8.73%
Mohawk
Shares Outstanding
Value Per Share
$
Terminal Rate
DCF Valuation
Enterprise Value
Longterm Debt
Shortterm Debt
-Cash
-Net Debt (Cash)
Equity Value
Shares Outstanding
Value per Share
Current Price
EBITDA
2013
2014 Multiple
377,273.40
451,505.67 10.00x
462,444.00
523,066.20 12.00x
484,786.65
537,025.98 12.00x
(18,452.50)
(25,181.75) 10.00x
$ 1,308,064.55 $ 1,488,430.10 11.43x
$
183.91
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
Net Income
680,893.27 $ 906,802.88
7.73%
176.51
191.60
209.58
231.35
258.27
292.41
337.12
26.00x
WACC
8.23%
8.73%
160.30
146.35
172.92
157.02
187.73
169.40
205.37
183.94
226.75
201.26
253.18
222.25
286.69
248.19
Enterprise Value
2013
2014
3,772,734.00
4,515,056.70
5,549,328.00
6,276,794.40
5,817,439.74
6,444,311.73
(184,525.00)
(251,817.50)
$ 14,956,989.74 $ 16,986,359.33
2,257,391.00
2,257,391.00
89,031.00
89,031.00
63,580.00
63,580.00
2,282,842.00
2,282,842.00
12,674,147.74
14,703,517.33
73,737.64
73,737.64
$
171.88 $
199.40
Equity Value
$ 17,703,225.12 $ 23,576,874.81
73,737.64
73,737.64
$
240.08 $
319.74
9.23%
134.21
143.33
153.81
165.96
180.24
197.25
217.85
9.73%
123.56
131.43
140.38
150.67
162.60
176.62
193.32
Figure 16: Income Statement Bear Case
Revenue
$
-Cost of Sales
Gross Profit
-SG&A
-Impairment of Goodwill and Intan
Operating Income
Income before Taxes
-Taxes
Net Income
$
Shares Outstanding
EPS
$
Tax Rate
Cost of Sales
Gross Profit
SG&A
Operating Income
Income before Taxes
Taxes
Net Income
Growth Analysis YOY
Revenue
Cost of Sales
Gross Profit
SG&A
Operating Income
Income before Taxes
Taxes
Net Income
2008
2009
2010
2011
2012
6,826,348.00 $ 5,344,024.00 $ 5,319,072.00 $ 5,642,258.00 $ 5,787,980.00
5,088,584.00
4,111,794.00
3,916,472.00
4,225,379.00
4,297,922.00
1,737,764.00
1,232,230.00
1,402,600.00
1,416,879.00
1,490,058.00
1,318,501.00
1,188,500.00
1,088,431.00
1,101,337.00
1,110,550.00
1,543,397.00
(1,124,134.00)
43,730.00
314,169.00
315,542.00
379,508.00
21,288.00
(5,588.00)
(11,630.00)
14,051.00
303.00
127,050.00
127,031.00
133,151.00
101,617.00
74,713.00
(1,272,472.00)
(77,713.00)
192,648.00
199,874.00
304,492.00
180,062.00
(76,694.00)
2,713.00
21,649.00
53,599.00
(1,452,534.00)
(1,019.00)
189,935.00
178,225.00
250,893.00
5,694.00
4,480.00
4,464.00
4,303.00
635.00
(1,458,228.00) $
(5,499.00) $ 185,471.00 $ 173,922.00 $ 250,258.00
68401
68452
68,784.00
68,964.00
69,306.00
(21.32) $
(0.08) $
2.70 $
2.52 $
3.61
-14%
99%
1%
11%
18%
74.54%
25.46%
19.31%
-16.47%
1.86%
-18.64%
2.64%
-21.28%
0.08%
-21.36%
2013
2014
2015
2016
2017 Past CAGR
$ 7,906,815.45 $ 8,279,454.47 $ 8,686,332.90 $ 9,120,649.54 $ 9,529,268.79
-4%
5,845,173.92
6,108,206.75
6,383,076.05
6,670,314.47
6,970,478.62
-4%
2,061,641.53
2,171,247.73
2,303,256.85
2,450,335.07
2,558,790.17
-4%
1,465,926.00
1,524,563.04
1,585,545.56
1,648,967.38
1,714,926.08
-4%
595,715.53
646,684.69
717,711.29
801,367.69
89,655.60
94,138.38
98,845.30
103,787.56
506,059.93
552,546.31
618,865.99
697,580.12
101,211.99
110,509.26
123,773.20
139,516.02
404,847.94
442,037.04
495,092.79
558,064.10
666.75
700.09
735.09
771.85
$ 404,181.19 $ 441,336.96 $ 494,357.70 $ 557,292.25 $
69306
69306
69306
69306
$
5.83 $
6.37 $
7.13 $
8.04 $
20%
20%
20%
20%
843,864.09
108,976.94
734,887.15
146,977.43
587,909.72
810.44
587,099.28
69306
8.47
20%
76.94%
23.06%
22.24%
0.82%
2.38%
-1.45%
-1.44%
-0.02%
0.08%
-0.10%
73.63%
26.37%
20.46%
5.91%
2.50%
3.62%
0.05%
3.57%
0.08%
3.49%
74.89%
25.11%
19.52%
5.59%
1.80%
3.54%
0.38%
3.16%
0.08%
3.08%
74.26%
25.74%
19.19%
6.56%
1.29%
5.26%
0.93%
4.33%
0.01%
4.32%
73.93%
26.07%
18.54%
7.53%
1.13%
6.40%
1.28%
5.12%
0.01%
5.11%
73.78%
26.22%
18.41%
7.81%
1.14%
6.67%
1.33%
5.34%
0.01%
5.33%
73.48%
26.52%
18.25%
8.26%
1.14%
7.12%
1.42%
5.70%
0.01%
5.69%
73.13%
26.87%
18.08%
8.79%
1.14%
7.65%
1.53%
6.12%
0.01%
6.11%
73.15%
26.85%
18.00%
8.86%
1.14%
7.71%
1.54%
6.17%
0.01%
6.16%
-21.71%
-19.20%
-29.09%
-9.86%
-103.89%
-0.01%
-93.89%
-142.59%
-99.93%
-21.32%
-99.62%
-0.47%
-4.75%
13.83%
-8.42%
618.43%
4.82%
-347.90%
-103.54%
-18739.35%
-0.36%
-3472.81%
6.08%
7.89%
1.02%
1.19%
0.44%
-23.68%
3.75%
697.97%
-6.17%
-3.61%
-6.23%
2.58%
1.72%
5.16%
0.84%
20.27%
-26.48%
52.34%
147.58%
40.77%
-85.24%
43.89%
36.61%
36.00%
38.36%
32.00%
56.97%
20.00%
66.20%
88.83%
61.36%
5.00%
61.51%
4.71%
4.50%
5.32%
4.00%
8.56%
5.00%
9.19%
9.19%
9.19%
5.00%
9.19%
4.91%
4.50%
6.08%
4.00%
10.98%
5.00%
12.00%
12.00%
12.00%
5.00%
12.01%
5.00%
4.50%
6.39%
4.00%
11.66%
5.00%
12.72%
12.72%
12.72%
5.00%
12.73%
4.48%
4.50%
4.43%
4.00%
5.30%
5.00%
5.35%
5.35%
5.35%
5.00%
5.35%
Future CAGR
5%
5%
6%
4%
9%
-12%
-26%
-42%
5%
10%
10%
10%
5%
10%
10%
Figure 17: Projected Cash Flows Bear Case
EBIT
EBIT(1-T)
-Working Capital
Operating Cash Flow
-Capital Expense
Free Cash Flow
FCF Conversion
D&A/CapEX
Tax
2008
(1,124,134.00)
(1,283,205.33)
295,054.00
76,781.00
(1,064,932.33)
217,824.00
(1,282,756.33)
1.14
(5.89)
-14%
2009
43,730.00
573.40
303,004.00
321,911.00
(18,333.60)
108,925.00
(127,258.60)
(2.91)
0.01
99%
2010
314,169.00
309,744.66
296,773.00
(167,485.00)
774,002.66
156,180.00
617,822.66
1.97
1.98
1%
2011
315,542.00
281,364.62
297,734.00
(202,304.00)
781,402.62
275,573.00
505,829.62
1.60
1.02
11%
2012
379,508.00
312,704.11
280,293.00
9,939.00
583,058.11
208,294.00
374,764.11
0.99
1.50
18%
2013
593,104.92
474,483.94
406,768.55
100,000.00
781,252.48
500,000.00
281,252.48
0.47
0.95
20%
2014
612,779.26
490,223.41
427,812.35
100,000.00
818,035.76
450,000.00
368,035.76
0.60
1.09
20%
2015
640,684.49
512,547.59
449,513.33
100,000.00
862,060.92
400,000.00
462,060.92
0.72
1.28
20%
2016
675,837.76
540,670.21
471,989.00
100,000.00
912,659.21
350,000.00
562,659.21
0.83
1.54
20%
2017
709,629.65
567,703.72
495,588.45
100,000.00
963,292.17
350,000.00
613,292.17
0.86
1.62
20%
Figure 18: Carpet Bear Case
Net Sales
Operating Income
EBITDA
Free Cash Flow
2008
3,628,183.00
(216,152.00)
92,130.00
(124,022.00)
78,239.00
(202,261.00)
2009
2,856,741.00
(125,965.00)
94,134.00
(31,831.00)
35,149.00
(66,980.00)
2010
2,844,876.00
122,904.00
91,930.00
214,834.00
84,013.00
130,821.00
2011
2,927,674.00
109,874.00
90,463.00
200,337.00
125,630.00
74,707.00
2012
2,912,055.00
158,196.00
95,648.00
253,844.00
97,972.00
155,872.00
Assets
ROA
1,876,696.00
-11.52%
1,582,652.00
-7.96%
1,637,319.00
7.51%
1,769,065.00
6.21%
1,721,214.00
9.19%
-5.96%
2.54%
-3.42%
2.16%
-4.41%
3.30%
-1.11%
1.23%
4.32%
3.23%
7.55%
2.95%
3.75%
3.09%
6.84%
4.29%
-21.26%
-41.72%
2.18%
-74.33%
-55.07%
-0.42%
-197.57%
-2.34%
-774.92%
139.02%
2.91%
-10.60%
-1.60%
-6.75%
49.54%
Margin Analysis
Operating Income
EBITDA
Growth Analysis
Net Sales
Operating Income
EBITDA
2013
3,057,657.75
169,269.72
100,430.40
269,700.12
107,769.20
161,930.92
2014
3,210,540.64
179,425.90
105,451.92
284,877.82
118,546.12
166,331.70
2015
3,371,067.67
190,191.46
110,724.52
300,915.97
130,400.73
170,515.24
2016
3,539,621.05
199,701.03
116,260.74
315,961.77
136,920.77
179,041.00
3,716,602.11
-5%
5%
209,686.08
5%
122,073.78
1%
5%
331,759.86
5%
143,766.81
6%
7%
187,993.05
5.43%
3.28%
8.72%
3.36%
5.54%
3.28%
8.82%
3.52%
5.59%
3.28%
8.87%
3.69%
5.64%
3.28%
8.93%
3.87%
5.64%
3.28%
8.93%
3.87%
5.64%
3.28%
8.93%
3.87%
-0.53%
43.98%
5.73%
26.71%
-22.02%
5%
7%
5%
5%
10%
5%
6%
5%
5%
10%
5%
6%
5%
5%
10%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
Figure 19: Ceramic Bear Case
Net Sales
Operating Income
EBITDA
Free Cash Flow
2008
1,815,373.00
(323,370.00)
46,093.00
(277,277.00)
41,616.00
(318,893.00)
2009
1,426,757.00
84,154.00
47,934.00
132,088.00
17,683.00
114,405.00
2010
1,367,442.00
97,334.00
45,578.00
142,912.00
37,344.00
105,568.00
2011
1,454,316.00
101,298.00
42,723.00
144,021.00
66,419.00
77,602.00
2012
1,616,383.00
120,951.00
41,176.00
162,127.00
49,426.00
112,701.00
Assets
ROA
1,693,765.00
-19.09%
1,546,393.00
5.44%
1,644,448.00
5.92%
1,732,818.00
5.85%
1,731,258.00
6.99%
-17.81%
2.54%
-15.27%
2.29%
5.90%
3.36%
9.26%
1.24%
7.12%
3.33%
10.45%
2.73%
6.97%
2.94%
9.90%
4.57%
7.48%
2.55%
10.03%
3.06%
-21.41%
-126.02%
3.99%
-147.64%
-57.51%
-4.16%
15.66%
-4.92%
8.19%
111.19%
6.35%
4.07%
-6.26%
0.78%
77.86%
11.14%
19.40%
-3.62%
12.57%
-25.58%
Margin Analysis
Operating Income
EBITDA
Growth Analysis
Net Sales
Operating Income
EBITDA
Proforma
2,776,000.00
250,000.00
83,280.00
333,280.00
111,040.00
222,240.00
9.01%
3.00%
12.01%
4.00%
2013
2,914,800.00
275,000.00
87,444.00
362,444.00
117,702.40
244,741.60
2014
3,060,540.00
294,250.00
91,816.20
386,066.20
124,764.54
261,301.66
2015
3,213,567.00
311,905.00
96,407.01
408,312.01
131,002.77
277,309.24
2016
3,374,245.35
330,619.30
101,227.36
431,846.66
137,552.91
294,293.75
3,542,957.62
-3%
5%
347,150.27
6%
106,288.73
-3%
5%
453,438.99
6%
144,430.56
4%
5%
309,008.44
9.43%
3.00%
12.43%
4.04%
9.61%
3.00%
12.61%
4.08%
9.71%
3.00%
12.71%
4.08%
9.80%
3.00%
12.80%
4.08%
9.80%
3.00%
12.80%
4.08%
5%
10%
5%
5%
6%
5%
7%
5%
5%
6%
5%
6%
5%
5%
5%
5%
6%
5%
5%
5%
5%
5%
5%
5%
5%
Figure 20: Laminate & Wood Bear Case
Net Sales
Operating Income
EBITDA
Free Cash Flow
2008
1,465,208.00
(564,911.00)
149,543.00
(415,368.00)
90,500.00
(505,868.00)
2009
1,128,315.00
105,953.00
151,450.00
257,403.00
45,966.00
211,437.00
2010
1,188,274.00
114,298.00
145,941.00
260,239.00
29,439.00
230,800.00
2011
1,344,764.00
127,147.00
151,884.00
279,031.00
78,615.00
200,416.00
2012
1,350,349.00
126,409.00
132,183.00
258,592.00
56,605.00
201,987.00
Assets
ROA
2,663,599.00
-21.21%
2,598,182.00
4.08%
2,475,049.00
4.62%
2,533,070.00
5.02%
2,672,389.00
4.73%
-38.56%
10.21%
-28.35%
6.18%
9.39%
13.42%
22.81%
4.07%
9.62%
12.28%
21.90%
2.48%
9.45%
11.29%
20.75%
5.85%
9.36%
9.79%
19.15%
4.19%
-22.99%
-118.76%
1.28%
-161.97%
-49.21%
5.31%
7.88%
-3.64%
1.10%
-35.95%
13.17%
11.24%
4.07%
7.22%
167.04%
0.42%
-0.58%
-12.97%
-7.32%
-28.00%
Margin Analysis
Operating Income
EBITDA
Growth Analysis
Net Sales
Operating Income
EBITDA
Proforma
1,950,349.00
160,000.00
195,034.90
355,034.90
97,517.45
257,517.45
2013
2,047,866.45
184,000.00
204,786.65
388,786.65
102,393.32
286,393.32
2014
2,150,259.77
202,400.00
215,025.98
417,425.98
107,512.99
309,912.99
2015
2,257,772.76
214,544.00
225,777.28
440,321.28
112,888.64
327,432.64
2016
2,370,661.40
225,271.20
237,066.14
462,337.34
118,533.07
343,804.27
2,441,781.24
-2%
4%
236,534.76
6%
248,919.45
-3%
5%
485,454.21
6%
124,459.72
-11%
5%
360,994.48
8.20%
10.00%
18.20%
5.00%
8.98%
10.00%
18.98%
5.00%
9.41%
10.00%
19.41%
5.00%
9.50%
10.00%
19.50%
5.00%
9.50%
10.00%
19.50%
5.00%
9.69%
10.19%
19.88%
5.10%
5%
15%
5%
5%
5%
5%
10%
5%
5%
5%
5%
6%
5%
5%
5%
5%
5%
5%
5%
5%
3%
5%
5%
5%
5%
Figure 21: Corporate Bear Case
Net Sales
Operating Income
EBITDA
Free Cash Flow
2008
(82,416.00)
(19,701.00)
7,288.00
(12,413.00)
7,469.00
(19,882.00)
Assets
ROA
212,115.00 664,219.00 342,110.00 171,275.00 178,823.00
-9.29%
-3.07%
-5.95%
-13.30%
-14.57%
Margin Analysis
Operating Income
EBITDA
Growth Analysis
Net Sales
Operating Income
EBITDA
23.90%
-8.84%
15.06%
-9.06%
2009
(67,789.00)
(20,412.00)
9,486.00
(10,926.00)
10,127.00
(21,053.00)
2010
(81,520.00)
(20,367.00)
13,324.00
(7,043.00)
5,384.00
(12,427.00)
2011
(84,496.00)
(22,777.00)
12,664.00
(10,113.00)
4,909.00
(15,022.00)
2012
(90,807.00)
(26,048.00)
11,286.00
(14,762.00)
4,291.00
(19,053.00)
2013
(113,508.75)
(35,164.80)
14,107.50
(21,057.30)
4,505.55
(25,562.85)
2014
(141,885.94)
(63,296.64)
15,518.25
(47,778.39)
4,730.83
(52,509.22)
2015
(156,074.53)
(75,955.97)
16,604.53
(59,351.44)
4,967.37
(64,318.81)
2016
(163,878.26)
(79,753.77)
17,434.75
(62,319.01)
5,215.74
(67,534.75)
(172,072.17)
2%
11%
(83,741.45)
7%
24%
18,306.49
12%
7%
(65,434.96)
4%
33%
5,476.52
-13%
5%
(70,911.49)
30.11%
-13.99%
16.12%
-14.94%
24.98%
-16.34%
8.64%
-6.60%
26.96%
-14.99%
11.97%
-5.81%
28.69%
-12.43%
16.26%
-4.73%
30.98%
-12.43%
18.55%
-3.97%
44.61%
-10.94%
33.67%
-3.33%
48.67%
-10.64%
38.03%
-3.18%
48.67%
-10.64%
38.03%
-3.18%
48.67%
-10.64%
38.03%
-3.18%
-17.75%
3.61%
30.16%
-11.98%
35.59%
20.26%
-0.22%
40.46%
-35.54%
-46.84%
3.65%
11.83%
-4.95%
43.59%
-8.82%
7.47%
14.36%
-10.88%
45.97%
-12.59%
25%
35%
25%
5%
5%
25%
80%
10%
5%
5%
10%
20%
7%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
Figure 22: Valuation Bear Case
Shares Outstanding
Warrants
RSU
Converts
ITM Options
Strike Price
Net new shares
Book Value of Debt
Cost of Debt
Risk Free Rate
Market Risk Premium
Beta
Cost of Equity
Tax Rate
WACC
Multiple Valuation
$
$
$
8,988,672.79 WACC
2,257,391.00 g
89,031.00
63,580.00
2,282,842.00
6,705,830.79
73,737.64
90.94
146.75
8.73%
3.00%
Segment
Carpet
Ceramic
Laminate/Wood
Corp
Total
Longterm Debt
Shortterm Debt
-Cash
-Net Debt (Cash)
Equity Value
Shares Outstanding
Value per Share
72,625.00
605.00
995.00
74.87
507.64
73,737.64
2,346,422.00
10,820,998.15
5.22%
3.00%
8.00%
1.38
9.89%
35.00%
8.73%
Mohawk
Shares Outstanding
Value Per Share
$
Terminal Rate
DCF Valuation
Enterprise Value
Longterm Debt
Shortterm Debt
-Cash
-Net Debt (Cash)
Equity Value
Shares Outstanding
Value per Share
Current Price
EBITDA
2013
2014 Multiple
269,700.12
284,877.82 10.00x
362,444.00
386,066.20 12.00x
388,786.65
417,425.98 12.00x
(21,057.30)
(47,778.39) 10.00x
$ 1,001,886.47 $ 1,042,605.61 11.48x
$
90.94
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
Net Income
404,181.19 $ 441,336.96
7.73%
86.68
95.32
105.63
118.11
133.54
153.11
178.73
26.00x
WACC
8.23%
8.73%
77.40
69.41
84.63
75.53
93.12
82.62
103.23
90.96
115.48
100.89
130.63
112.92
149.84
127.79
Enterprise Value
2013
2014
2,697,001.20
2,848,778.23
4,349,328.00
4,632,794.40
4,665,439.74
5,009,111.73
(210,573.00)
(477,783.90)
$ 11,503,208.94 $ 12,014,914.46
2,257,391.00
2,257,391.00
89,031.00
89,031.00
63,580.00
63,580.00
2,282,842.00
2,282,842.00
9,220,366.94
9,732,072.46
73,737.64
73,737.64
$
125.04 $
131.98
Equity Value
$ 10,508,711.04 $ 11,474,760.89
73,737.64
73,737.64
$
142.51 $
155.62
9.23%
62.47
67.70
73.70
80.67
88.85
98.60
110.41
9.73%
56.38
60.88
66.02
71.91
78.75
86.79
96.36
Figure 23: Price Target
Valuation Method
Scenario
DCF
EV/EBITDA
Bull
$ 183.91 $ 199.40 $
Base
144.18
168.96
Bear
90.94
131.98
Combined
145.45
170.70
Weight
25%
50%
Price Target $ 174.14
Low
Range
High
DCF
$ 90.94
$ 92.97
$ 183.91
EV/EBITDA
$ 131.98
$ 67.42
$ 199.40
P/E
Weight
319.74
30%
165.33
50%
155.62
20%
209.71
25%
P/E
$ 155.62
$ 164.12
$ 319.74
Valuation Football Field
Valuation Method
P/E
EV/EBITDA
DCF
$50
$100
$150
$200
Value per Share
$250
$300
$350
Figure 24: Comparable Company Analysis
Comparable Analysis
($ In millions)
Stock Characteristics
Current Price
Beta
Size
Short-Term Debt
Long-Term Debt
Cash & Cash Equivalents
Diluted Basic Shares
Market Capitalization
Enterprise Value
Growth Expectations
% Revenue Growth 2013E
% Revenue Growth 2014E
% EBITDA Growth 2013E
% EBITDA Growth 2014E
% EPS Growth 2013E
% EPS Growth 2014E
Valuation Ratios
Price/Earnings (TTM)
Price/Sales (TTM)
Price/Book (TTM))
Price/ Cash Flow (TTM)
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Profit Margin
Credit Metrics
Current Ratio (MRQ)
Debt/Equity (MRQ)
Leverage Ratio (MRQ)
Interest Coverage Ratio (TTM)
Efficiency Ratios
Days Sales Outstanding
Fixed Asset Turnover
Days Inventory
Operating Results
Total Revenue
Gross Profit
EBIT
EBITDA
Operating Cash Flow
Free Cash Flow
Net Income
EPS (TTM)
Multiples
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
MHK
AWI
TILE
MAS
50%
30%
20%
Max
$59.48
2.30
Min
$22.01
0.94
Median
$22.24
1.43
Weighted
Avg.
$40.79
1.36
$147.85
1.38
$59.48
0.94
$22.01
1.43
$22.24
2.30
$206
$3,422
$1,351
351
$7,806
$10,030
$8
$275
$91
60
$1,453
$1,640
$33
$1,038
$336
66
$3,569
$4,200
$60
$1,286
$466
120
$3,781
$4,598
$386
$1,200
$312
73.62
$10,885
$12,914
$33
$1,038
$336
60
$3,569
$4,200
$8
$275
$91
66
$1,453
$1,640
$206
$3,422
$1,351
351
$7,806
$10,030
5.36%
9.20%
41.86%
26.56%
97.50%
49.29%
3.40%
6.40%
10.11%
19.16%
-2.74%
43.04%
3.60%
8.08%
15.07%
20.21%
16.67%
44.29%
3.89%
7.58%
18.94%
21.59%
23.13%
46.54%
36.61%
4.86%
55.30%
8.22%
68.69%
11.17%
3.60%
6.40%
15.07%
19.16%
-2.74%
49.29%
3.40%
9.20%
10.11%
26.56%
16.67%
44.29%
5.36%
8.08%
41.86%
20.21%
97.50%
43.04%
55.6
1.5
16.9
47.2
36.1
1.0
4.4
14.0
38.6
1.3
5.3
14.1
41.3
1.3
7.4
24.0
32.9
1.5
2.5
17.0
38.6
1.3
5.3
14.1
36.1
1.5
4.4
47.2
55.6
1.0
16.9
14.0
34.00%
10.40%
14.78%
5.01%
24.20%
3.50%
6.58%
-1.47%
25.20%
8.60%
9.55%
0.64%
27.34%
8.48%
11.57%
2.40%
25.70%
6.60%
11.96%
4.32%
24.20%
10.40%
14.78%
5.01%
34.00%
8.60%
9.55%
0.64%
25.20%
3.50%
6.58%
-1.47%
2.58
7.22
14.89
5.11
1.85
0.85
2.53
1.17
2.13
1.81
4.86
2.52
2.21
2.60
6.17
3.55
2.30
0.52
1.98
5.08
2.13
1.81
4.86
5.11
2.58
0.85
2.53
2.52
1.85
7.22
14.89
1.17
57.47
5.24
91.20
31.76
2.75
49.17
44.28
5.17
69.73
41.98
3.98
72.06
43.78
3.40
95.43
31.76
2.75
69.73
57.47
5.24
91.20
44.28
5.17
49.17
$7,745
$1,951
$271
$510
$281
$162
$131
$1.54
-$42
$932
$317
$65
$89
$47
$4
-$114
$0.40
-$199
$2,619
$633
$215
$387
$220
$21
$6
$0.61
-$119
$3,138
$802
$181
$322
$180
$44
$45
$1.03
-$136
$5,788
$1,490
$380
$692
$583
$374
$250
$4.50
-$208
$2,619
$633
$215
$387
$220
$21
$131
$1.54
-$199
$932
$317
$65
$89
$47
$4
$6
$0.61
-$42
$7,745
$1,951
$271
$510
$281
$162
-$114
$0.40
-$119
1.30
5.14
19.53
10.85
1.76
6.64
37.01
19.67
1.60
5.17
25.23
18.43
1.59
5.90
24.74
14.89
2.23
8.67
33.98
18.66
1.60
6.64
19.53
10.85
1.76
5.17
25.23
18.43
1.30
5.14
37.01
19.67
MHK= Mohawk Industries/ AWI= Armstrong World Industries/ TILE= Interface, Inc./ MAS= Masco Corporation
Source: Company Documents, Student Estimates
Figure 25: DuPont Analysis
Mohawk Industries
2008
2009
2010
2011
2012
TTM
Revenue
$6,826,348
$5,344,024
$5,319,072
$5,642,258
$5,787,980
$6,860,309
EBT
$1,272,472
-$77,713
$192,648
$199,874
$304,492
$398,479
EBIT
$1,124,134
$43,730
$314,169
$315,542
$379,508
$491,803
Interest Expense
$127,050
$127,031
$133,151
$101,617
$74,713
$85,500
Income Tax
$180,062
-$76,694
$2,713
$21,649
$53,599
$75,668
Net Income
$1,452,534
-$1,019
$189,935
$178,225
$250,893
$320,524
Total Assets
$6,446,175
$6,391,446
$6,098,926
$6,206,228
$6,303,684
$8,564,157
Shareholders Equity
$3,153,803
$3,200,823
$3,271,556
$3,415,785
$3,719,617
$4,324,485
-21.28%
-0.02%
3.57%
3.16%
4.33%
4.67%
Asset Turnover (Sales ÷ Total Assets)
1.06
0.84
0.87
0.91
0.92
0.80
Equity Multiplier (Total Assets ÷ Shareholders Equity)
2.04
2.00
1.86
1.82
1.69
1.98
-46.06%
-0.03%
5.81%
5.22%
6.75%
7.41%
114.15
1.31
98.59
89.17
82.40
80.44
1.13
-1.78
0.61
0.63
0.80
0.81
-16.47%
0.82%
5.91%
5.59%
6.56%
7.17%
Asset Turnover (Sales ÷ Total Assets)
1.06
0.84
0.87
0.91
0.92
0.80
Equity Multiplier (Total Assets ÷ Shareholders Equity)
2.04
2.00
1.86
1.82
1.69
1.98
-46.06%
-0.03%
5.81%
5.22%
6.75%
7.41%
($ In Thousandths)
Three-Step DuPont Model:
Net Profit Margin (Net Income ÷ Sales)
Return on Equity
Five-Step DuPont Model:
Tax Burden (Net Income ÷ EBT)
Interest Burden (EBT ÷ EBIT)
Operating Income Margin (EBIT ÷ Sales)
Return on Equity
Source: Company Documents, Student Estimates
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
Net Profit Margin
(%)
Asset Turnover
Equity Multiplier
2009
2010
2011
2012
Breaking Down ROE into DuPont formula components shows that Mohawk’s net profit margin increased from 3.57% in 2010 to 4.33% in
2012. MHK also increased its asset turnover ratio from .87 in 2010 to .92 in 2012. Mohawk’s equity multiplier has remained relatively
constant over the last few years with slight deleveraging, with its equity multiplier decreasing from 1.86 in 2010 to 1.69 in 2012. These
figures suggest that Mohawk was able to generate higher margins while increasing volume of sales for each unit of asset held, indicating
higher management efficiency over the recent years.
Figure 26: Sources
1.
2.
3.
4.
5.
6.
7.
Company Financials
Bloomberg Terminal
FactSet
JPMorgan Research Report
Morningstar
Yahoo Finance
Census.gov
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this
company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of
interest that might bias the content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the
subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and
believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or
implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any
investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer
or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation
by any individual affiliated with Atlanta Society of Finance and Investment Professionals, CFA Society of Alabama,
CFA Society of South Carolina, CFA Institute or the CFA Institute Research Challenge with regard to this company’s
stock.

CFA Institute Research Challenge - Atlanta Society of Finance And

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