Masonite Inc. Case Analysis

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Company Overview
Masonite Inc. (NYSE: DOOR) is a vertically integrated designer and manufacturer of interior and exterior doors for residential construction (37%), renovation, remodelling, and repair (43%) and commercial building construction (20%). Having made 17 acquisitions since 2010, Masonite’s portfolio of brands now includes Marshfield, Mohawk, Algoma, Birchwood Best, Door-Stop, Harring Doors, Performance Doorset Solutions, and National Hickman.
Masonite’s management team consists of Frederick Lynch (CEO), Russel Tiejema (CFO), Lawrence Repar (COO) and Elias Barrios (GOM). All members have over 20 years of experience, and have a strong track record for delivering shareholder value. Annual salaries make up 39% of executive compensation;
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This competitive strength is unique to Masonite, as there are few vertically integrated door manufacturers in the world. Through strategic acquisitions since 2010, Masonite has enhanced its capabilities, and now controls the entire supply chain, including the design, production, and distribution of doors and glass panels. Management expects this vertical integration to result in cost synergies moving forward, with EBITDA margins improving from 10% in 2015 to between 14-15% by 2018.
Masonite’s vertical integration and range of capabilities have landed its products in major home improve retailers Home Depot and Lowes. The company’s ability to handle every supply chain element from design to distribution has recently made it a favourite for producing private label brands. Lowe’s recently offered Masonite a new contract with an even higher pricing than the previous producer due to their ability to provide merchandising and delivery
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Additionally, a healthy balance sheet with just 1.9x Net Debt to EBITDA gives Masonite the flexibility to continue to make additions to its portfolio.
Valuation
After a series of UK acquisitions in 2015, Masonite’s stock sold off 11% in the days following Brexit. Despite recovering in the following months, the stock again sold off after a short-term unfavourable pricing mix caused the company to miss its earnings estimate. The stock sold off again, and has not recovered since.
As the only publicly-traded vertically integrated door manufacturer, it is difficult to value the company on a relative basis. When compared to home improvement manufacturing companies of similar size, Masonite trades at a discount on forward EBITDA multiples, but a premium on forward PE multiples. Thus, an intrinsic analysis is more appropriate for valuing this company
Based on an intrinsic analysis, using housing starts and renovation spending as revenue growth drivers, assuming EBITDA margin expansion and capital expenditures in line with management guidance, an 8.0x exit multiple still represents a potential upside of over 10% despite a rally of 14% already since the election on November

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