Tony Anderson
At the start of the COVID-19 crisis, I American Woodmark Corporation (Nasdaq:AMWD) The company fell behind on its promises after acquiring RSI in 2018. The leverage was high, but the promise was unfulfilled: to activate the potential, real action was needed, and in 2020 that didn't seem likely anytime soon.
Now, four more years later, the company is still struggling. Earnings and sales have slowly improved, but have not kept pace with inflation. That makes me cautious, and lower leverage and lower earnings multiples also lower my expectations. The latter makes me a bit optimistic, as I don't have enough confidence in the business to add to my small residual position.
Kitchen & Bath Cabinets
Paragraph headings are really American Woodmark's business is so dependent on the fate and state of the housing market that, nearly a decade after the 2008 economic crash, the company announced a massive deal worth more than $1 billion to acquire RSI Home Products.
The deal was expected to increase American Woodmark's sales to about $1.56 billion, up from just over $1 billion in 2017. Expected synergies could boost earnings from about $4-5 to $8 a share, something that was badly needed after the company took on significant debt in the RSI acquisition.
In early 2020, the company had seen moderate growth so far in 2019, which had caused the stock price to rise into triple-digit territory in early 2020. With the stock trading in the low $100s and trading at roughly 14 times forward earnings, I was cautious. While the resulting earnings multiple looked reasonable, there was still significant debt on the balance sheet and the company remains cyclical.
Turbulent times
Since the beginning of the 2020s, American Woodmark's stock price has seen many ups and downs in its tumultuous four years. The stock price fell to the $30s after the pandemic hit, recovered to the $100s in 2021, and then fell to the $40s in 2022 as rising interest rates cast a shadow over the (new) housing market.
Those headwinds (from rising interest rates) were probably much smaller than expected, allowing the stock to bounce back to the $100 level this spring before dropping to $80 per share today. To see what happened, I look back to last May when the company reported its fiscal 2023 results.
Revenues for the year increased 11% to $2.06 billion, up from $1.6 billion in 2018 amid moderate growth and inflationary pressures. GAAP operating income was $136 million, and GAAP net income was $94 million, or $5.62 per share. Adjusted earnings were reported at $7.62 per share, with most of the difference due to amortization expense. In contrast to the late 2010s, leverage had decreased significantly, with net debt of $330 million and a leverage ratio of 1.4x.
The company sees some benefits compared to 2022, which will be hit hard by inflationary pressures. Rising interest rates are clouding the outlook, and the company expects fourth-quarter sales to decline on an annualized basis. Additionally, the company expects sales to decline in the low double digits in 2024, with EBITDA expected to be $215 million, plus or minus $10 million.
Results exceed expectations
Fast forward to May of this year, and American Woodmark reported a 10.6% decline in sales to $1.85 billion. Despite the pressure on sales, the company managed to grow adjusted EBITDA by 5.2% to $252.8 million, with margin performance in particular coming in much better than expected.
Adjusted earnings per share increased by almost $1, to $8.53, and net debt decreased to $287 million. Combined with improved EBITDA, leverage fell to 1.1x.
While this looks promising amid improving sales figures throughout the year, the problem is that the company's profit margins actually declined in the fourth quarter. In fact, adjusted earnings per share fell by nearly half a dollar to $1.70, raising doubts about whether the company can repeat similar performance in 2025.
The company expects low single-digit revenue growth for fiscal 2025 and EBITDA of $235 million to $255 million, with the midpoint indicating modest margin pressure and flat overall results.
What next?
It's been four years since I last covered American Woodmark, and I can commend the company for further growth and gradually reducing the leverage on its balance sheet. In reality, from a sales and earnings perspective, performance has been modest, especially when factoring in the effects of inflation.
It's this lack of structural growth that makes me cautious, even though the company's valuation has compressed to about 10 times underlying earnings, partly because it doesn't pay a dividend and its leverage has decreased.
While the overall valuation is modest, the lack of structural growth is why I'm being cautious here. Additionally, the company has long-term ambitions, aiming for $350 million in EBITDA with a target of 5-6% compound annual growth in sales through 2028. Investors seem to be discounting these targets, so this $100 million improvement alone could result in double-digit earnings per share.
There are few signs of excitement for American Woodmark Corporation shares as the current fiscal year 2025 remains stagnant. In this climate, I am not confident in increasing my position here and hence am maintaining a very modest long-term residual position.
