Masco’s management baked in the anticipated 1st quarter decline. Long term outlook remains bullish.

-Masco (MAS) is one of the largest manufactories, sellers and installers of brand name home improvement products in the U.S. along with a strong global business. Their products and services are quite diverse in this sector with plumbing, cabinets, a decorative & specialty home assortment and installation service being the corner stone of their business. MAS continues to be a leader in all of these classifications and services with strong distribution to the building trade, distributors and home centers. (I.e. they account for over 5% of Home Depot’s sales)

-Management anticipated the reduction in the home improvement business and residential construction. The forecasts were made for a weak 1^st quarter and the metrics were adjusted accordingly. MAS believed the borrowing of home equity in FY ’06 was quite acute and as a result a somewhat artificial demand was created last year. With home loans down close to 50% from last year’s bloated rate coupled with the fact that over 30% of these loans go into home improvement management prepared and is hunkered down for the reduction in capital spending for home improvement that is occurring now.

-MAS long term outlook remains positive. As their rapid growth in the past was mainly fueled through acquisitions management is now focusing on maximizing their current portfolio of brands through operational and financial improvements and efficiencies. Management is particularly focused on their penetration of the markets that they are currently in. As the average home consists of about 25% of the materials and services MAS supplies they currently only account for about 12% - 18% of that number. Through new product design and improvements and the expansion of their installation business they are forecasting a significant penetration increase. With their paint, cabinet and window business projected for continued soft sales it is imperative that this initiative is successful and management is concentrating on this part of their business.

-Management is also concerned about the increased cost of the raw materials they use in the manufacturing of their product and are investing time and money into their purchasing models and software used in this dynamic. MAS has paid a dividend (increased) in their last 48 years and will continue this trend. They are currently looking at other areas of cost reduction inclusive of headcount reductions, new software introductions to maximize profitability and an improvement in corporate governance.

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