American Woodmark Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMWD)") else Response.Write("(Nasdaq: AMWD)") end if %>
Phone: 540-665-9100
Website: http://www.americanwoodmark.com
Price (2/18/97): $20

HOW DID IT DOUBLE?

American Woodmark's stock jumped 50% in August to around $8 a share on the announcement of a stellar first quarter that solidified an earnings turnaround that started in the fourth quarter of 1996. The trend continued with the November 25th announcement of another outstanding quarterly earnings report that sent the shares up $3 to a high of $12 1/4. In the past two months, as the company's story has gradually spread to investors, the stock has skyrocketed, recently hitting a high of $22 3/8.

The second quarter report for the period ending October 31st showed net income rocketing 463% to $0.45 a share from $0.08 per share a year ago on only a modest 16% increase in sales. The first six months of fiscal '97 showed the same pattern, with per share earnings soaring 462% to $0.73 from $0.13 on just a 15% sales boost.

The company has now turned in three consecutive quarters of record earnings. In the process, American Woodmark has reduced long-term debt from 31% of total capital to just 22.7%, the lowest level in the firm's history. Now on better financial footing, the company recently announced its first quarterly cash dividend of two cents a share.

The story here is that capital investments made in fiscal '95 and '96 have started to pay off in improved labor productivity and better material utilization. Good economic conditions and a strong market position have increased sales, especially at national home center stores such as Home Depot, allowing American Woodmark to take full advantage of its new efficiencies. Gross margins expanded to 28.9% in the second quarter from 19.7% in the same period last year, and those improved margins are making the bottom line sparkle.

BUSINESS DESCRIPTION

Based in Winchester, Virginia, American Woodmark Corp. designs, manufactures, and distributes kitchen cabinets and vanities. The company gets 60% of its business from the remodeling market and 40% from new home construction. Its products are sold on a national basis through a network of independent distributors and directly to major builders, home manufacturers, and home center stores such as Home Depot, Lowe's, and Builder's Square. The company presently operates seven manufacturing facilities and four service centers across the country.

American Woodmark markets about 100 different cabinet styles under the brand names American Woodmark, Crestwood, Timberlake, Scots Pride, and Coventry and Case. Its products range from relatively inexpensive to medium priced. The company makes cabinets from oak, cherry, and maple lumber as well as particle board.

FINANCIAL FACTS

Income Statement

12-month sales:     $220 million 
12-month income:    $8.4 million 
12-month EPS:       $1.10  
Profit margin:       3.8% 
Market Cap:         $154 million 

Balance Sheet

Cash:               $10.9 million
Working Capital:    $20.3 million
Long-term Debt:     $12.2 million     

Ratios
Price-to-earnings:  18.3
Price-to-sales:      0.70

WHERE TO FROM HERE?

No analysts currently cover American Woodmark. No ready comparisons present themselves either, since the company is the only pure-play cabinet manufacturer that's public. So what's a Fool to do?

A call to the company offered these insights. The second quarter is the company's strongest; the third its weakest. The fourth is comparable to, though a little stronger than, the first. American Woodmark has become far more efficient over the last two years, with a 7-9 day turnaround to customers, far below the industry average of 4-6 weeks. That means the company has minimal risk of building up excessive inventories and thus a good chance of maintaining the currently strong margins. The company's improved responsiveness might even boost sales, allowing further growth in margins due to efficiencies of scale.

On the other hand, the company's short turnaround time on orders doesn't offer much of a backlog on which to predict forward sales. Any slowing in the market for new home construction could pressure the business. Yet a slow economy often boosts spending on remodeling, so the company's home center presence offers something of a hedge in the case of an economic downturn.

At $19 a share, the company is trading at 17 times trailing earnings. With the possible exception of the forthcoming third quarter results, earnings will almost certainly not see triple-digit growth in the future. Still, net income could continue to grow faster than sales. If sales rise 15% in the next year to $253 million and net margins rise even slightly to 4%, earnings for the 12 months ending in October could come in around $1.32 per share, or exactly 20% above the current trailing numbers. Using a PE multiple of 15 to 20, these shares aren't a huge bargain, but they may have room to grow to the mid-20s over the next year.

-Louis Corrigan (RgeSeymour)