Mohawk Industries (MHK)

Recent results have benefitted from unusual movements in reserve levels

Mohawk Industries (MHK) is a leading manufacturer of flooring products including ceramic tile, wood, laminate, carpet, and luxury vinyl tile. We have followed this company for years and observed often how its quarters are often peppered with unusual benefits that seem to be material to the company meeting or slightly beating consensus EPS estimates.

In the case of the 12/21 quarter, MHK’s non-GAAP EPS of $2.95 beat consensus estimates by 9 cps. However, we identified multiple items that could have boosted reported earnings by a much higher amount. If these benefits fade, it may make meeting expectations in upcoming quarters more difficult.

We recognize that the company’s stock price has already been pummeled partly due to concerns that inflation and higher rates will mute home improvement-related demand. Still, we believe the earnings quality items represent a hidden layer of risk that investors should be considering.