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alstry (36.32)

Alstry's Detailed Equity Analysis

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November 05, 2008 – Comments (8)

In the spirit of showing my cards at all times.....I will provide a few upcoming posts providing some detailed analysis on my red thumb candidate MHK...Mohawk Industries.

This past quarter....MHK took over $1 Billion in writedowns due in part to its stock price trading down.....the following is a snipit from the recent conference call:

David MacGregor - Longbow Research

What share price were the write-offs based on?

Frank Boykin

It was an average price, David. I think it was around $62.

David MacGregor - Longbow Research

I do not want a long answer, but is there a short answer as to how the average is calculated, is it over a quarter?

Frank Boykin

Can we take it offline? It will be a long answer.

First, why did management force this issue offline....what ever happended to FULL DISCLOSURE as outlined in Rule FD?  (this is especially important since MHK has relatively little cash and outstanding borrowings in its bank line subject to leverage ratio covenants) Second, how large a write down is MHK contemplating this quarter now that its stock is ALREADY trading down $20 per share from its average price last quarter where write-offs were based?

How does management see the sales environment for next quarter????

Ray Huang - JPMorgan

Hello. This is Ray Huang on for Mike. So going down to the fourth quarter guidance, looks like the third quarter sales held up actually relatively well. Did the trend get significantly worse in October or is it more a function of the inventory reductions and the margin contraction that you had expected in the fourth quarter?

Jeff Lorberbaum

It is all of the above. We expect demand to continue decreasing. We do not see the consumers at this point changing. We see a slowing of the commercial business. We see the higher cost inventory, which came from peak prices in the third quarter, flowing into the fourth quarter, where it is going to be used. We have inventory reductions, compounding the low sales volume, creating a negative absorption just talked about.

There are price increases that some of the divisions put in during the quarter will not be fully recognized in the first quarter. There is unfavorable FX and then we have some unfavorable GAAP hedges, which the majority of it will be through in the fourth quarter. So the combination of all those are making the fourth quarter much worse than we would like it to do.

http://seekingalpha.com/article/104019-mohawk-industries-inc-q3-2008-earnings-call-transcript?source=yahoo&page=6

Whoops!!!

Right now analysts are forecasting a profit of about $1 per share next quarter.....the company has provided pre-write-off guidance of $0.20-$0.30 per share.  Based simply on current share price and current business outlook.....it apprears next quarter MHK could face very large losses again.

It will be interesting to see what analyst revisions will be over the next few days.

8 Comments – Post Your Own

#1) On November 05, 2008 at 6:05 PM, jegr5347 (< 20) wrote:

Today LZB is down 5.13% vs 4.6% for MHK.

GAME ON!!  ;)

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#2) On November 05, 2008 at 6:18 PM, alstry (36.32) wrote:

jegr,

not to be nitpicky....but does LZB meet our $500MM dollar minimum as outlined in the original post????

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#3) On November 05, 2008 at 6:26 PM, btown819 (95.74) wrote:

Alstry, it sounds like MHK is facing a tough time, but why are you concerned about additional losses due to accounting write-offs?  Don't these non-cash charges only effect accounting goodwill and tax deferred assets?  Those don't sound like they have much earnings impact to me. 

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#4) On November 05, 2008 at 6:32 PM, alstry (36.32) wrote:

They do if the debt covenant becomes impaired due to the write downs and the business is dependent on the line of credit.

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#5) On November 05, 2008 at 6:45 PM, jegr5347 (< 20) wrote:

You are right. LZB is in NYSE but not $500mil mkt cap. Change of strategy. Switching to SKS.

Non cash charges chip away your net worth and trigger acceleration clauses in most debt covenants. It seems MHK will have to do this once again.

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#6) On November 05, 2008 at 8:22 PM, alstry (36.32) wrote:

Excellent choice and a very impressive return on my feeble attempt to call your bluff.

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#7) On November 05, 2008 at 9:38 PM, MarketBottom (29.38) wrote:

Very good analysis, Dell on the other hand is in a lot of trouble. Their direct model is broken, and while trying to repair that with a new retail model, it breaks. Maybe the world has enough computers, printers, monitors, and other junk for now.

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#8) On November 05, 2008 at 11:13 PM, alstry (36.32) wrote:

Dell is a good one as well.... the PC is just becoming a commodity and there is deminishing need for customization...therefore it will be difficult for American manufacturers  to compete with Asian  counterparts....the PC is becoming a TV.

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