Behr Essentials

In the coatings world, steady as she goes may be the key motto for growth and survival in an ever-changing economic climate. Taylor, MI-based Masco Corporation seems to have grasped onto this concept and analysts are heartened by the company's future prospects due, in part, to the fact that Masco acquired both Behr and Masterchem in 1999 and 2000, respectively.

"I think the business will continue to grow with (Behr) being the private label product for Home Depot. I don't think being tied to Home Depot, in that respect, is going to be limited in terms of expansion to other markets," said David Weaver, an analyst who covers Masco for Legg Mason.

In the U.S., architectural coatings sales, including interior and exterior house paint, represent approximately a $6.4 billion a year market. Approximately 49% of sales of all architectural coatings come through company-owned stores, roughly 30% goes to independent non-company owned dealers and around 21% goes to mass merchandisers.

Within the mass-merchandising channel, home center stores like Home Depot, with more than 1,000 stores, and Lowe's, with more than 700 stores, dominate the market.

With that background, many contend Masco has gained some solid footing and is poised for further gains in the paint market. Adding to the mix the fact that mortgage refinancing is on the rise, and a company like Masco, which focuses on do-it-yourself products, may be the right antidote for consumers looking to spruce up their homes.

"(Painting) is a quick and inexpensive home improvement project," said Joseph Sroka, equity analyst at Merrill Lynch. "It's not like re-doing your kitchen-it's a very efficient way to redecorate your house. We should get a nice run of mortgage refinance spending."

At Home with Home Depot
Masco has benefited from the growth in home center stores. The company's fourth quarter 2001 combined sales to Home Depot, Lowe's and Wal-Mart rose approximately 17%. "The improvement in sales and incoming orders that the company experienced in the fourth quarter of 2001 has continued and, if anything, accelerated during the first two months of 2002," said Richard A. Manoogian, chairman and chief executive officer, Masco. "The company estimates that its worldwide internal sales growth, excluding acquisitions and divestitures, approximated eight percent during January and February of this year. North American internal sales growth during January and February approximated 10%."

Breaking it down, architectural coatings sales rose 31% as a result of marketing initiatives contributing to continued market share gains, the company reported. Sales by segment in the 2001 fourth quarter versus the 2000 fourth quarter included an 11% rise in decorative architectural products which includes paint and stains, as well as mechanical and electronic lock sets and door, window and other hardware. For the year (2001), sales in that segment rose to $1.512 billion from $1.395 in 1999.

Home Depot is Masco's largest customer for decorative architectural products, reaching $2.1 billion in 2001 and representing approximately 25% of total sales.

Legg Mason's Mr. Weaver said drawing a comparison with last year's fourth quarter was not particularly difficult or surprising, largely due to the weak economy and weak retail environment over the past couple of years. "They're continuing to grow with Home Depot, and the addition of Masterchem helps out as well," he noted. "I think the business will recover gradually through the year. They're coming off business conditions that were relatively poor in the last year, but I think as retail picks back up, it will bode well for the company."

With the season for home construction and remodeling generally reaching a peak during the second and third quarters, Masco may see a further rise in sales for this segment as the year progresses. "We've gone through an economic downturn and the homebuilding market goes through cycles. But home improvements are perpetual," added Merrill Lynch's Mr. Sroka. "What was a problem in 2001 was a serious draw down in inventories, but I think we're getting past that now."

Approximately 85% of Masco's sales are generated by operations in North America (primarily in the U.S.). International operations comprise the balance and are located principally in Denmark, Germany, Italy, Spain and the United Kingdom.

Both Mr. Weaver and Mr. Sroka said they expect Masco's sales growth to be in the mid-teens over the next several years, boosted by Home Depot's expansion.

"They're (Masco) solely supplying Home Depot with Behr products so they're tied to Home Depot's growth specifically," said Mr. Weaver.

Mr. Sroka added, "If you're getting some sort of single-digit same-store growth out of Home Depot and then Home Depot is adding probably somewhere around 10-20% square footage a year, (that's where the growth comes from)."

What's Next?
With Behr securing the Home Depot channel, and Masterchem taking up some of the smaller, specialty retailers, what is Masco's next move? The company appears to be in no rush to overstep its bounds or give up its leadership.

"The company is fairly limited to specialty products," Mr. Weaver noted. "Masco wants to have market leading products and to get into other coatings products beyond the DIY centers, you really only have a few major brand names such as Benjamin Moore and Sherwin-Williams. I don't think Masco would be buying a company like that. I think you'd see more of the Masterchem-type product, a specialty product within the coatings market." However, Mr. Weaver contends dealing with the U.S.'s largest DIY home chain will most likely be the company's focus. "I think growing the Behr business in lock-step with Home Depot will provide them with enough challenges over the next several years," he said.

California-based Behr Process Corporation provides paint, stains and coatings marketed under the brand names Premium Plus, Expressions, Behr 1-Coat and Plus 10 banners. Meanwhile, Antonia, MO-based Masterchem Industries, Inc. manufactures specialty paint products, including primers and rust-preventive coatings under the Kilz and Hammerite names. The company also markets coatings under the Hammerite name. Masterchem products are sold on a nationwide basis to more than 32,000 outlets, including paint and hardware stores. Nearly 90% of the company's sales are to retailers, with the remainder going to wholesale buyers.

Mr. Sroka sees a possible synergy developing between Behr and Masterchem. "There's certainly an opportunity to fully introduce Masterchem's product into Behr's already robust distribution system. I don't think it presents any channel conflict or brand overlap." He continued, "Behr already had a strong brand presence at Home Depot when it was acquired, so I think Masco, either through product introduction or maybe some smaller acquisitions like Masterchem, will look to augment its presence in that category."

While the economy is hard to predict and companies are perpetually trying to remain optimistic, analysts agree that Masco has been and will continue to be an attractive company.

"They're gaining market share at the retailers that are gaining market share and that's a positive," said Mr. Sroka. "One of the reasons Behr was so attractive to Masco was the fact that it not only had a strong presence at Home Depot but it has also been awarded Home Depot Vendor of the Year (awards). So, not only are you at Home Depot but you really have a superior position and are well respected by Home Depot as a vendor."

It's clear that Masco doesn't rush into decisions and, analysts contend it makes smart choices. The coatings industry will have to stay tuned for the company's next move.