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Armstrong World Up 68% Year to Date: Will Growth Continue?

Zacks Equity Research

Armstrong World Industries, Inc.’s AWI shares have gained more than 68% in the year-to-date period, comparing favorably with its industry’s 29.5% rally. This leading global producer of ceiling systems has been riding high on solid Architectural Specialties business, higher average unit values ("AUV") and strategic acquisitions.

We believe there is still momentum left in this Zacks Rank #3 (Hold) stock, which is quite evident from its long-term impressive earnings growth rate of 19% and a VGM Score of B.

Let’s delve deeper into the factors that are driving the stock.

Strategic Buyouts: Acquisitions have been a key growth strategy of the company. On Mar 4, 2019, it acquired Architectural Components Group, Inc. (“ACGI”), a leading custom wood ceilings and walls solution provider. Also, in 2018, it had purchased OH-based manufacturer of aluminum and stainless metal ceilings, Steel Ceilings, and a 31-year manufacturer, Plasterform.

The acquisitions will give a boost to the existing wood ceiling and wall solutions business. Notably, the ACGI buyout, which is the company’s largest acquisition to date, is expected to add $20-$25 million to total sales in 2019.

Notably, in the first quarter, the Architectural Specialties segment revenues increased 24% year over year on the back of robust acquisitions, and higher volumes due to increased market penetration and new construction activity.

Robust Price Realization & Volume Improvement: Armstrong World has been implementing higher prices in order to offset increased input costs and extra freight activity. Remarkably, in the first quarter, its gross margins improved by an impressive 660 basis points (bps) and adjusted EBITDA margin expanded 330 bps year over year, courtesy of higher volume, price, and mix. Robust price realization and volume improvement are likely to strengthen the company’s growth prospects in the long haul.

Product Innovation to Drive Top Line: Armstrong World has been strategically investing in new products, sales and support services, as well as advanced manufacturing capabilities. In this regard, on Jun 25, 2019, the company introduced ACOUSTIBuilt Seamless Acoustical Ceilings, a new system that provides the look of drywall but performs like an acoustical ceiling.

This is likely to drive AUVs higher in 2019 and beyond.

Strong Housing Industry: Armstrong World remains optimistic of solid housing market fundamentals. The overall market is reflecting strong prospects, post torrid second half of 2018. Declining mortgage rates, steady economic growth, high consumer confidence and favorable demographics are likely to continue providing a healthy backdrop for the housing industry.

The company’s construction and renovation of commercial, institutional and residential buildings will be most benefited as a result. For 2019, Armstrong World expects high-single digit sales growth, backed by volume gains in Architectural Specialties, AUV expansion in Mineral Fiber and acquisitions.

Superior ROE: Armstrong World’s return on equity (ROE) is indicative of growth potential. The company's ROE of 63.9% compares favorably with the industry's average of 13.7%, implying that it is efficient in using its shareholders' funds.

Key Picks

Some better-ranked stocks in the same space include Construction Partners, Inc. ROAD, Quanex Building Products Corporation NX and TopBuild Corp. BLD, each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Construction Partners has a three-five year expected EPS growth rate of 10%.

Quanex Building Products and TopBuild’s earnings for the current year are expected to grow 30.8% and 21.8%, respectively.

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