In this article, we share with you an exclusive idea from our BAD BEAT Investing service. Last week we put out an alert on Mohawk Industries (NYSE:MHK ) trading at $178. In the present column, we discuss why we recommended the name.

Mohawk is likely a name none of you have ever heard of, but may have done business with. This is a leading supplier of ceramic tile and countertops, as well as flooring globally. Those who have done major home improvements, purchased a recent new home, or had one built, may very likely have products from the company in your home.

It is the largest manufacturer, distributor and marketer of ceramic tile and natural stone in the world. It is also one of the largest suppliers of premium carpet, rugs, laminate, sheet vinyl, luxury vinyl tile and wood flooring in North America. Outside of North America, it's a leading supplier of premium laminate, sheet vinyl, carpet, wood and luxury vinyl tile flooring. The European product line also includes roofing systems, insulation panels and other wood boards for the construction, cabinet and furniture markets.

Source: Mohawk Industries, Global Foot Print

You may recognize some of the brands under its umbrella. For stone and ceramic products: Daltile, American Olean, Complete Countertops, Panoramic Porcelain Surfaces, One Quartz Surfaces, Marazzi, and Ragno are just a few. For flooring think Karastan, Mohawk Group, Durkan, Mohawk Home, Quick-Step, Pergo and IVC Resilient Design, to name just a few. The name is a global behemoth in the space.

Source: Mohawk Industries, About Us

The stock is dropping like a rock today, which has caught our attention here at BAD BEAT Investing:

While this is a sudden drop, it continues a bad run for the company that began earlier this year. When we look longer term, the pain becomes even more obvious.

Take a look at the 5-year chart:

As you can see, this is some pretty ugly action on the recent portion of the long-term chart. There may be more downside ahead, but applying some BAD BEAT technical zones, we see from the chart potential for a support bounce:

As such, we think you really need to focus on this name in the next few sessions. Keep the stops tight just in case, but not only is there a technical reason to look at the name, but there are fundamental reasons why you should be considering this name as well.

MHK's core business includes the design, manufacture, and distribution of flooring products for both residential as well as commercial applications. The company has a very wide range of products such as ceramic tiles, porcelain, laminate, wood, vinyl tiles, carpets, rugs, and so on. The company's solutions are used not only for flooring but also for walls, roofing, insulation boards, and chipboards. MHK is nearly three decades old and is based out of Calhoun, GA. In terms of geographical distribution, the products of MHK are available worldwide, but around 65% of its revenues are derived from the US, where the company has had the benefit of a strong housing market.

Let us be clear, housing is still very strong, and with interest rates rising, we suspect another few years at least of buyers rushing to buy their homes before "the rates go up.". Housing starts remain strong. Homebuilders remain solid. Yet, many businesses have felt the pinch. Some say this is an impending sign of a recession. We may be wrong, but we disagree. To get a better sense of what is going on, let's turn to recent performance, which definitely was surprisingly underwhelming. However, there are reasons to be positive.

Overall, results fell short of our expectations, and the company is taking actions to improve the performance of its U.S. businesses. With the overall economy, the company's results were negatively impacted by input inflation, higher transportation costs, a stronger dollar and a tight labor market. It was also affected by changing product mix, timing of price increases, lower production units, start-up of new projects and the delayed Godfrey Hirst closing.

To address these issues, the company is raising prices, expanding in growing channels and participating in new products and geographies. Businesses outside North America showed significant improvement. Although the economy in Europe is slowing somewhat, the results in most of the company's non-U.S. businesses improved substantially. There were some currency issues, as the dollar strengthened during the period, the Euro fell from $1.24 to $1.16, reducing Mohawk's translated results in U.S. dollars.

For Q2 overall, Mohawk saw earnings of $197 million and diluted EPS of $2.62. Adjusted net earnings were $263 million and EPS was $3.51, excluding restructuring, acquisition and other charges, a 6% decrease from last year. That hurt, and missed consensus expectations. Net sales for Q2 2018 were $2.6 billion, up 5% in the quarter and 3% on a constant currency basis. This compares to Q2 2017 which saw net sales of $2.5 billion, and net earnings were $261 million with EPS of $3.48. In Q2 2017, adjusted net earnings were $278 million and EPS was $3.72, excluding restructuring, acquisition and other charges.

So what about on a year-to-date basis? Well, so far net earnings and EPS are $405 million and $5.41, respectively. Net earnings excluding restructuring, acquisition and other charges are $488 million and EPS was $6.52, an increase over the 2017 six-month period adjusted EPS. For the six-month period ending July 1, 2017, net sales were $4.7 billion, net earnings were $461 million and EPS was $6.17; excluding restructuring, acquisition and other charges, net earnings and EPS were $482 million and $6.44. So there is growth yearly.

This is the bigger issue. A one-day selloff on a bad earnings makes sense, but we are cognizant of the selloff prior to this. The company and industry are absorbing significant inflation. This year, it has had two carpet price increases and recently followed those with a third increase to offset additional material and freight inflation. There is not much more that can be done. In effect, higher energy prices have led to higher shipping prices, while the stronger economy has led to inflation. The company is taking pricing actions in most product categories impacted by inflation, including the higher value ceramic products. In addition, weak guidance at the early part of the year led to the initial wave of selling. We think it is overdone, especially with the growth.

Source: Mohawk Industries Annual Report

Analysts are clearly very bullish with respect to MHK given its strong fundamentals and the current valuations. Out of the 22 analysts following the stock, 17 have a BUY recommendation, 7 have a STRONG BUY recommendation, and 5 have a HOLD recommendation from the beginning of July 2018. The target price range of these analysts is quite high, with the highest target being $341 and the median being a far more reasonable number of $277.41. The lowest is $215.

The amount of leverage on the company's balance sheet is also low as the long-term debt to equity ratio is 0.29. Despite all the positives, MHK is trading at a price to earnings ratio of hardly 3.2 (impacted by tax reform), and a forward price to earnings of 11. That is cheap. It also has a price to sales of 1.2. These numbers tell us that there is a good scope for multiples expansion for the company, in conjunction with the technical background.

There is value here. MHK has a great combination of attractive fundamentals with low valuation multiples. There is insider buying as well as institutional buying that works in its favor. To start the year, weak guidance and inflation hit the name. Now it is facing a tough quarter, but we view this as a BAD BEAT opportunity. There is technical support and fundamental reasons to look for a bounce in the name.

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Disclosure: I am/we are long MHK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.