Mohawk (NYSE: MHK) Surprises Everyone And Leads The S&P 500

While most of the market’s attention this week has been fixed on digesting polling numbers for the US election, Mohawk Industries (NYSE: MHK) has quietly been putting in a serious shift. Shares are up 26% in the past two sessions and were among the best performers in equity markets yesterday.

It’s been a bumpy ride for investors of the $8 billion flooring manufacturer this year who’ve endured an unexpected global pandemic, then an unexpected boom in DIY housing projects, and then allegations of accounting fraud. For a couple of weeks before summer, shares were trading back at 2012 levels but for all that, they’re up more than 100% from the lows and now find themselves within touching distance of their pre-COVID prices.

Solid Earnings

The big catalyst for the current pop has been the company’s Q3 earnings which were released on Friday. Even though revenue was only up 2% year on year, it was still higher than analysts expected, as were their EPS numbers. In the grand scheme of things, to be able to show annual growth at all is probably just about what investors were hoping for in Q3’s print.

Q2’s numbers, reported in August, showed revenue contracting more than 20% on the year while EPS was firmly in the red. The company has managed to avoid a repeat of that this time and Wall Street is happy to reward them.

The main drivers in the quarter’s growth came from increased volume and productivity as well as favorable material costs. These helped to offset some stagnant movement in their ceramic and flooring segments while boosting operating profit by 56%. CEO Jeffrey Lorberbaum said with the release; “our results in the period significantly exceeded our expectations, with sales recovering and operating income substantially increasing above last year’s levels. Under continued pandemic conditions, people all over the world are spending more time in their homes and working remotely. Globally, this trend is increasing investments in home remodeling as well as driving new home purchases.”

There was certainly a big jump in home improvement projects during the initial few months of COVID and it will be interesting to see if this momentum continues into the fall and winter months. With countries around the world starting to re-enter fresh lockdowns, the folks over at Raymond James see the glass as half full. On Monday they upgraded Mohawk shares to a Strong Buy rating from Outperform. Their price target of $140 suggests upside of more than 35% from Friday’s closing price which should entice even the more risk averse investor to take a look.

Looking Ahead

Management took the opportunity with last week’s earnings report to update investors on the status of the fraud allegations that they’ve been battling since before the summer. As we wrote back in July, Deutsche Bank had raised some questions about the company’s numbers being cooked, and investors weren’t slow about sending shares down about 40% in just three days.

However, shares have recovered most of that damage since and on Friday management met the allegations head on. They said; “with the assistance of outside legal counsel, the Company’s Audit Committee completed a thorough internal investigation into these allegations of wrongdoing and concluded that the allegations are without merit. The Company is cooperating fully with the ongoing governmental investigations and will continue to vigorously defend against the lawsuit, which the Company does not believe has merit.”

There’s still more hoops for them to jump through on the legal side of things but if they can put them to bed then there’s serious potential for upside in Mohawk shares through the end of the year. They’re on the verge of breaking a three year downtrend and the housing market is doing well - what’s not to like?