The discussion around interest rates has taken a massive turn in the past few months. It is no longer around the issue of whether the Federal Reserve will need to raise rates. Rate cuts are coming…the debate now is around when and by how much. 

And while a lot of industries and sectors will benefit from lower rates, especially small cap stocks, one industry that should be a clear winner is homebuilding and remodeling. Two standout supplier stocks in that area are Masco (MAS), and for a small cap play which may have even more juice, Masonite Industries (DOOR). 

Masco (MAS) is a major player in the building materials industry, supplying everything from decorative architectural products, to exterior wood products, to the screws that hold your glass shower door in place. The company has over 19,000 employees, 30 manufacturing facilities in North America, and another 8 world wide.

Masco has been using the current high rate environment, which is challenging existing home buyers and sellers in particular, to increase efficiency in its operations. In the latest quarter the company increased gross margins YoY by 610 basis points to 37.6%. As CEO Keith Allman stated in the earnings release, “Our continued ability to successfully execute in a challenging demand environment, along with our continued focus on driving productivity improvements led to strong margin performance and earnings per share growth in the third quarter.” Operating profit in the quarter also increased 9%.

Tightening up the ship should pay hefty dividends when rates loosen for mortgage seekers, and demand for home building and remodeling materials picks up across the board in 2024. 

Masco is a B rated stock in our POWR Ratings, and sits in the home improvement category. Its top component rating is in Quality where it rates above 90% of the stocks we track.

Turning to a smaller home building supplier, Masonite Worldwide (DOOR) has been using 2023 to perform a number of acquisitions and expand its portfolio. 

The company recently announced the acquisition of high end door provider Fleetwood for $285 million, and just a few days ago added a bid for PGT Innovations (PGTI) at $41 a share. Fleetwood gives Masonite a strong presence in California, especially in the premium exterior door category, with a large manufacturing facility focused on extra large glass doors. PGTI is known for its impact resistant glass…and the integration of both companies is expected to run smoothly with little overlap to Masonite’s current product line. These were Masonite’s second and third major acquisitions in 2023.

The acquisitions are expected to drop around $100 million in synergies to the bottom line, and will result in Masonite having a combined revenue of around $4 billion. Commenting on the PGT acquisition, CEO Howard Heckes stated, “The combined business will be well positioned to provide homeowners with differentiated solutions across both the interior and exterior openings of the home, while significantly expanding our geographic presence and growth opportunities.

In its latest quarterly report Masonite increased its cash flow substantially for the first nine months of 2023 to $310 million from only $83 million in the same time frame in 2022. The company also shored up its cash position, increasing cash and cash equivalents by over $150 million to $663 million. Masonite has been implementing a number of working cash flow initiatives which resulted in record cash flow generation reported in the quarter.

After its acquisitions, Masonite comes into 2024 with a much larger client base and distribution network just at the right time for an uptick in the housing market. The stock sold off a bit on the PGTI announcement, into the mid-80s, but should have no trouble regaining the century mark should rates ease even a small amount. 

Masonite is a B rated stock in our POWR Ratings. It’s exceptionally strong in the Momentum component, where it ranks above 98% of the companies in our database.  

Both Masco and its smaller compatriot DOOR stand to make solid gains in a more benign mortgage rate environment in 2024. Both companies have shored up their operating models, and in the case of DOOR greatly increased their potential earnings. Both stocks appear to be potential big winners in the fast approaching new year.

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MAS shares were trading at $66.76 per share on Thursday afternoon, down $0.28 (-0.42%). Year-to-date, MAS has gained 46.08%, versus a 24.68% rise in the benchmark S&P 500 index during the same period.

About the Author: Steven Adams

After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA. More...

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