The Business of Value Investing.pdf

The Only Three Types of Investments You Need to Know 27

Year Free Cash Flow

2004 $ 136 million

2005 $ 314 million

2006 $ 616 million

2007 $ 712 million

As you can see without doing any math, the rate of growth in

free cash fl ow has been exceptional, averaging well over 20 per-

cent a year. The company has generated tremendous cash for the

shareholders.

But the past is the past, and looking at the company today, you

have to extrapolate from the past performance and see if the future

operations of the business coupled with today ’ s market value indi-

cate that Mohawk is indeed undervalued. It ’ s time to start looking

at the business.

Mohawk is one of the top two suppliers of fl ooring products

in the United States, which includes carpets and rugs, ceramic tile,

laminate, and hardwoods. The three markets that Mohawk sup-

plies are new residential construction, commercial real estate, and

residential replacement. As of late 2008, the real estate industry was

deteriorating rapidly, and Mohawk ’ s business was feeling the pain

in declining home sales. Nonetheless, the company ’ s bulk business

comes from replacement fl ooring, and the commercial segment

remained stable. While sales volume was slowing, Mohawk still was

doing respectable business. But because the market was so sour on

the economic environment, the stock price was getting hit.

In addition, Mohawk operates a state - of - the - art distribution sys-

tem with over 300 locations across the country serviced by a fl eet of

over 1,000 trucks. The chief executive, Jeff Lorberbaum, has been

with the company since day one when it was formed to acquire the

business he previously ran. He and his family own over 17 percent

of the company, so he defi nitely has skin in the game. Unless you

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