Over the past six months, Masco’s shares (currently trading at $62.22) have posted a disappointing 7.7% loss while the S&P 500 was down 1.8%. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
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Why Do We Think Masco Will Underperform?
Even though the stock has become cheaper, we're cautious about Masco. Here are three reasons you should be careful with MAS and a stock we'd rather own.
1. Core Business Falling Behind as Demand Plateaus
Investors interested in Home Construction Materials companies should track organic revenue in addition to reported revenue. This metric gives visibility into Masco’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Masco failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Masco might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Masco’s EPS grew at 5.1% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 1% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Masco’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Masco falls short of our quality standards. Following the recent decline, the stock trades at 14.1× forward P/E (or $62.22 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d suggest looking at one of our top software and edge computing picks.
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