Repair & Remodel Activity, New Products Buoy Armstrong World

On May 9, we issued an updated research report on Armstrong World Industries, Inc. AWI. The company is poised to gain from average unit value (AUV) improvement and tax reform. Its focus on restructuring activities, investment in new products and the Tectum acquisition are anticipated to drive growth.

 

Let’s analyze these growth factors in detail.

 

Rising AUV to Boost Top Line

 

Armstrong World delivered a 6% rise in first-quarter 2018. Net sales increased 3% year over year to $227 million, driven by higher Architectural Specialties volumes and higher Mineral Fiber AUV.  Notably, the company concluded $100-million investment in 2017 to develop industry-leading Mineral Fiber manufacturing capabilities which support volume and AUV growth.

 

Considering these factors, the company guided its net sales growth range of 5-7% for 2018 aided by AUV improvement in Mineral Fiber segment and continued double-digit sales growth in the Architectural Specialties segment.

 

EPS Guidance Hiked

 

The company raised EPS guidance to $3.60-$3.82, reflecting year-over-year growth of 19-27%. Its results will also be aided by strong repair and remodel activity, as well as the continuation of positive new building construction activity. The guidance hike is a result of $70 million of share repurchases in the first quarter, which reduced outstanding share count to 52 million from 53 million previously.

 

Price Hikes, Seasonal Factors to Boost Near-term Results

 

In the first quarter of 2018, costs for raw materials, sourced products and energy negatively impacted operating income by $3 million compared with the prior-year quarter. In the quarter, the company implemented a price increase on both Mineral Fiber ceiling tile and grid products effective in the quarter. Armstrong World also announced a price increase on certain Architectural Specialties products, and two additional price increases on grid products effective in the second quarter of 2018. Going forward, it may implement additional pricing actions based on numerous factors particularly movements in raw material prices.

 

Further, sales tend to be stronger in the second and the third quarters of the fiscal year due to more favorable weather conditions, customer business cycles, and the timing of renovation and new construction.

 

Focus on Restructuring to Boost Performance

 

In 2017, Armstrong World took steps to optimize its manufacturing footprint and overall cost structure. In November, the company announced its intention to close the St. Helens plant and open a distribution center near Phoenix in order to provide better service to its West Coast customers.

 

It has also planned to restructure the G&A profile to serve an Americas-focused business. These actions will yield cost savings in the range of $15-$20 million by the end of 2019. These will also stoke EBITDA growth in the second half of 2018 and the company expects to deliver $400 million of adjusted EBITDA in 2019.

 

Further, Armstrong World entered into an agreement to divest its EMEA and Pacific Rim businesses to Knauf in November. The transaction is subject to regulatory approvals as well as other customary conditions and is expected to close in mid-2018. The company anticipates realizing around $250 million of net cash following the conclusion of the deal and return majority of the net proceeds to shareholders.

 

Armstrong World to Gain From Product Launches

 

The company has been strategically investing in new products, sales and support services, and advanced manufacturing capabilities. In the spring of 2017, it took a major step to fortify the Mineral Fiber category with the launch of Sustain.

 

Further, the introduction of Total Acoustics in 2016 has strengthened its leadership position at the high-end of the Mineral Fiber segment. These launches have experienced extraordinary rates of adoption by architects, and the company expects the penetration of these products to continue through 2018 and beyond.

 

Tectum Acquisition to Propel Growth

 

In January 2017, Armstrong World closed the buyout of Tectum, which accelerated its penetration into specialty ceilings and walls. Throughout the year, its team integrated Tectum into the Armstrong platform, and the results have exceeded expectations.

 

Now having fully integrated the business, the company can begin making modest capital investments to further enhance capabilities and profitability in this product line. Moreover, continued sales leverage and capital investments at Tectum will enable its Architectural Specialty business to expand margins in 2018 and beyond.

 

Share Price Performance

 

 

Armstrong World has outperformed its industry with respect to price performance over the past six months. The stock has appreciated around 26%, while the industry has recorded growth of 9%.

 

Zacks Rank & Other Stocks to Consider

 

Armstrong World carries a Zacks Rank #2 (Buy).

 

Some other top-ranked stocks in the industry include PGT Innovations, Inc. PGTI, Patrick Industries, Inc. PATK and Installed Building Products, Inc. IBP. While PGT Innovations and Patrick Industries sport a Zacks Rank #1 (Strong Buy), Installed Building Products carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

 

PGT Innovations has a long-term earnings growth rate of 19%. The company’s shares have been up 57% in a year’s time.

 

Patrick Industries has a long-term earnings growth rate of 12.7%. The stock has gained 23% in a year’s time.

 

Installed Building Products has a long-term earnings growth rate of 17.3%. Its shares have gone up 23% in the past year.

 

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