3 Factors That Underscore Armstrong World's Solid Prospects

Higher Mineral Fiber and Architectural Specialties volumes, robust price realization, along with new product investment bode well for Armstrong World Industries, Inc. AWI. Also, productivity improvement in plants, focus on restructuring activities and a strong balance sheet are likely to aid its bottom line.

Meanwhile, Armstrong World’s shares have gained 34.8% in a year’s time against its industry’s decline of 5.1%. Also, earnings estimates for the current year have moved up 0.3% over the past 30 days, boosting analysts’ optimism surrounding the stock’s performance.

Let’s delve deeper into the factors that make the stock an attractive pick.

Higher Volume to Boost Performance: Armstrong World is riding high on volume growth in both Mineral Fiber and Architectural Specialties businesses. In the first six months of 2018, the company’s net sales grew 6.8% mainly driven by volume, pricing and mix growth in both the sectors, along with higher average unit value (“AUV”) in the Mineral Fiber segment.

For 2018, net sales growth is projected in the range of 5-7%, aided by a modest upturn in volume, AUV improvement and double-digit sales increase in the Architectural Specialties business. Additionally, the company expects EBITDA to improve more than 10% for the year, with adjusted EPS to range within $3.60-$3.82, reflecting 19-27% growth on a year-over-year basis.

Strategic Inorganic Moves: Armstrong World follows a systematic inorganic strategy to enhance its portfolio. In August 2018, the company acquired Johnstown, an Ohio-based manufacturer of metal ceilings and specialty systems Steel Ceilings, Inc. (“SCI”). This acquisition bolstered Armstrong's presence in the fields of architectural, radiant and security solutions.

Additionally, Armstrong World divested EMEA and Pacific Rim businesses to Knauf, which constitutes significant part of the company’s ongoing transformation plan.

Also, it implemented higher price realization to offset input cost inflation and additional freight activity. The company’s adjusted EBITDA grew 8.7% and EBITDA margin expanded 60 basis points year over year in the first half of 2018, courtesy of higher volume, price, and mix.

New Product Investment: Armstrong World is highly focused on strategic investment in new products, sales and support services, as well as advanced manufacturing capabilities. In 2017, Armstrong World took a major step to fortify the Mineral Fiber business, with the launch of Sustain. Also, it invested $100 million to increase its manufacturing capabilities for supporting volume and AUV growth.

Apart from the above-mentioned initiatives, Armstrong World is also well poised on its free cash flow. The company anticipates free cash flow to grow in the range of 20-30% in 2018, backed by lower capital expenditure and a cash tax rate in the low 20s. Moreover, it has plenty of liquidity to support capital allocation priorities, including M&A.

Notably, Armstrong World flaunts a VGM score of B. Also, the company’s ROE of 41.9% compares favorably with the industry’s average of 12.4%, implying that it is efficient in using its shareholders’ funds.

Zacks Rank and Stocks to Consider

Currently, Armstrong World carries a Zacks Rank #2 (Buy). Other top-ranked stocks in the same industry are Continental Building Products, Inc. CBPX, PGT Innovations, Inc. PGTI and NCI Building Systems, Inc. NCS. While Continental Building and PGT Innovations sport a Zacks Rank #1 (Strong Buy), NCI Building carries a Zacks Rank #2. You can also see the complete list of today’s Zacks #1 Rank stocks here.

Continental Building’s earnings for the current year are expected to increase 52.6%.

PGT Innovations’ earnings are likely to grow 80.3% for the current year.

Earnings for NCI Building are expected to grow 81.3% in 2018.

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