Mohawk Industries has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 15.8% to $132.33 per share while the index has gained 17.5%.

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Why Do We Think Mohawk Industries Will Underperform?

We're swiping left on Mohawk Industries for now. Here are three reasons we avoid MHK and a stock we'd rather own.

1. Core Business Falling Behind as Demand Declines

We can better understand Home Furnishings companies by analyzing their organic revenue. This metric gives visibility into Mohawk Industries’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Mohawk Industries’s organic revenue averaged 3.4% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Mohawk Industries might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Mohawk Industries historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.9%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Mohawk Industries’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

Mohawk Industries falls short of our quality standards. That said, the stock currently trades at 13.1× forward P/E (or $132.33 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

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