Analysis of American Woodmark Company (AMWD)

Hello everyone,

I am a newbie to this board but a long time Fool over at the Mechanical
Investing Board and BRK Board.

I have always been interested in finding ways to invest a portion of my
funds in other individual stocks and was excited to recently come
across this board. I have ready the Knowledgebase and thought I’d take
a stab at it with a few stocks I have found interesting.

This is the first of what I hope will be a few posts of companies that
this board may not yet have looked at. As I am new at this, I strongly
welcome suggested corrections and improvements to my methods!

Following a somewhat recent posting of Saul’s for LGIH, here is an
analysis of AMWD.

Background:

American Woodmark Corporation manufactures and distributes kitchen
cabinets and vanities for the remodeling and new home construction
markets. The Company offers framed stock cabinets in approximately 600
different cabinet lines, ranging from relatively inexpensive to
medium-priced styles. Styles vary by design and color from natural
wood finishes to low-pressure laminate surfaces. The product offering
of stock cabinets includes 85 door designs in 19 colors. Stock cabinets
consist of cabinet interiors of a range of dimensions and construction
options and a maple, oak, cherry, or hickory front frame, door and/or
drawer front. The Company’s products are sold under the brand names of
American Woodmark, Timberlake, Shenandoah Cabinetry, Potomac and
Waypoint Living Spaces.

Financials:

Quarter    Revenues  GAAP Earnings  Adjusted Earnings  Shares Outstanding (M)  GAAP EPS  Adjusted EPS
FY2015 Q2       256           18.2               18.7                    16.5      1.10          1.13
FY2015 Q1       231           15.2               15.8                    16.4      0.93          0.97
FY2014 Q4       207           11.3               11.9                      16      0.71          0.75
FY2014 Q3       189            7.3                7.7                    16.1      0.45          0.48
FY2014 Q2       218            7.7                8.3                      16      0.48          0.52
FY2014 Q1       212            9.2                9.7                    15.8      0.58          0.61
FY2013 Q4       189            5.6                6.1                    15.7      0.36          0.39
FY2013 Q3       169            2.9                3.4                    15.8      0.18          0.22
FY2013 Q2       190            5.3                5.9                    15.6      0.34          0.38
FY2013 Q1       178            6.6                7.2                    14.8      0.45          0.48
FY2012 Q4       171            5.2                5.7                    14.9      0.35          0.38
Quarter    T12 Adj Earnings  T12 Adj EPS  T12 Revenue  T12 EPS Growth  QoQ T12 EPS Growth
FY2015 Q2              54.2         3.33       883.00             92%                 23%
FY2015 Q1              43.8         2.71       845.00             70%                 15%
FY2014 Q4              37.7         2.36       826.00             61%                 18%
FY2014 Q3              31.8         2.00       808.00             37%                 15%
FY2014 Q2              27.5         1.74       788.00                                  9%
FY2014 Q1              25.1         1.60       760.00                                  9%
FY2013 Q4              22.6         1.47       726.00                                  0%
FY2013 Q3              22.2         1.46       708.00
  • Fiscal Year starts May 1 of each year, so FY '16 started May 1, 2015

Adjusted EPS adds back stock based compensation. They do have
significant pension benefits, but I am unsure how to treat those and
would appreciate anyone’s thoughts on those!

My conclusions from the tables above:

  • Revenues show continued growth, but at a MUCH slower rate than EPS.
    This could be signs of economies of scale being achieved. It is
    hard to say how long the growth rate gap will continue to increase
    as it is dependent on their current capacity constraints.
  • Adjusted T12 EPS are accelerating, both Year of Year and Quarter
    over Quarter

Key Statistics:

Current Stock Price             77.82
Current Adj PE                  23.39
1 Year EPS Growth                 92%
1YPEG                           0.255
Analyst Est. 1 Year EPS Growth    19%
Tax Rate                          36%
Insider Ownership                 15%
Current Ratio                    3.05

Note: Analyst EPS growth is for FY17 vs FY 16
My conclusions from these statistics:

  • Analysts are indicating a strong slowdown in growth. Looking at
    their past estimates on Yahoo, I see patterns of sigificant
    underestimation, up to and including recent quarters. I need
    to this discrepancy before investing.
  • Very attractive 1YPEG
  • Relatively high insider ownership
  • Solid ability to cover near-term debt obligations
Stock Appreciation Scenarios
                                            EPS Growth
                                            Lower       Same  Higher
                                                   19%   92%    114%
            P/E               Lower   21.1          7%   72%     93%
                              Same    23.4         19%   92%    114%
                              Higher  35.1         79%  187%    222%

The scenarios above assume either T12 Adjusted EPS coming in where the
analysts expect, staying flat to the most recent quarter, or 10% above
that. P/E assumptions are either a slight decline, flat, or 50%
increase that seems more commensurate with such a high EPS growth
stock.

My conclusions from / thoughts on the above scenarios:

  • EPS is growing much more strongly than revenues, this may mean we
    have a sleeper stock, that they discovered a number of “one-time”
    efficiency gains that may not hold up, that they are enjoying
    economies of scale (which might or might not be reaching their
    limits). Tough to say which.
  • Upside strongly outweighs the downside. If EPS growth does continue
    on trend, the “Higher” cases seem more likely. If EPS only grows
    in line with past revenue growth, the lower cases are more likely.

Risks:

  • Rising interest rates hurt homeowners ability to renovate kitchens
    or for slow down the new construction market.
  • Broad economic slowdown in the US slows sales and depresses prices.
  • They have reached scale and growth will decline. The US cabinet-
    making market is $14B, giving American Woodmark about a 5% share.
    They are a “significant” player - already nationwide and in Lowes
    and Home Depot. That said, with such strong earnings growth, they
    have the ability to continue to grow revenues but it may be at the
    expense of earnings through reduced prices.

Final Thoughts:

  • This seems like a strong play to me. With the recent stock market
    correction, it is a good time to buy if one is interested (I am).
  • I believe this is stock that at worst will “market perform” and at
    best could be a huge gain in a relatively short time frame once
    Mr. Market notices what he has been missing (should current trends
    continue or not decline significantly).

What does everyone else think of this opportunity?

Best Regards,

Wes (SpiralingUp)

27 Likes

A few follow ups to the original post:

  • AMWD has a very strong balance sheet - long term debt of ~$21M vs.
    working capital of $198M.
  • They are one of the three largest cabinetmakers in the US, although
    as previously mentioned their share is less than 10% of the total
    market. Sales are about 1/2 and 1/2 between renovations and new homes.
    Lowes and Home Depot are nearly half their sales - loss of one of these
    customers would be very significant.
  • They are on their fifth straight year of double digit growth, well
    above their targeted market’s growth rate of ~5%.
  • Their annual report confirmed my hypothesis in my original post that
    cost savings initiatives led to the large increase in profit margins.
    These should be at least sustained, barring any pricing pressures.
    If they are not significantly improved, EPS can be expected to
    increase more in line with the levels analysts are projecting. This
    implies to me that the central expectation for the next year is ~19%
    stock price appreciation.
  • Other key risks include a hit to earnings if they need to expand
    capacity, a impairment charges if they need to revalue long-term
    assets that result in no longer being able to defer certain taxes
    (this would arise if there was a market downturn).

Overall this company seems like a solid performer, but is one that isn’t
likely to knock our socks off.

What do others think?

Wes

4 Likes

Good IBD ratings…


Checklist          Rating
Composite Rating 98 Pass
EPS Rating 99       Pass
RS Rating 98        Pass
Group RS Rating    A Pass
SMR Rating        B Pass
Acc/Dis Rating     D Fail