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Armstrong World (AWI) Banks on Digitization, High Costs Ail

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·6 min read
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Armstrong World Industries, Inc. AWI has been benefiting from digitization, strong demand from housing market, inorganic growth and investment in new products. Also, a strong liquidity position helps it mitigate uncertainty.

However, higher costs and supply chain issues are ailing the company. Also, project delays and oil price volatility add to the woes.

Although shares of global producer of ceiling systems have underperformed the Zacks Building Products – Miscellaneous industry in the year-to-date period, earnings estimates for 2022 reflect 16.7% year-over-year growth. The company also has solid earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in the eight out of the trailing 13 quarters. In the next five years, the company is likely to generate 13.2% earnings growth. Moreover, it currently has a Value Score of B.

Zacks Investment Research
Zacks Investment Research


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This positive trend signifies bullish analysts’ sentiments, indicating robust fundamentals and the expectation of outperformance in the near term. Let’s delve into this Zacks Rank #3 (Hold) company’s driving factors. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Building Strength

Digital Investments Bode Well: Armstrong World has remained focused on its digitalization initiative. The company is continuously investing in Healthy Spaces and digital initiatives and is optimistic about its contribution to its growth. In 2021, the company continued with additional digital investments, with several initiatives focusing on speed and cost benefits for customers. Armstrong World’s digital advancement and product innovation amidst COVID challenges place it as the only ceiling and specialty walls company across the country.

Solid Housing: Robust U.S. housing market fundamentals and repair & remodeling activities have been benefiting AWI. With the solid economic backdrop, demand for housing and building material products has been robust in the past few quarters, given the increasing trend of consumers to invest more in homes amid the pandemic. Apart from the remarkable recovery in single-family housing construction, repair/remodel activity also has been robust.

Acquisitions Boosting Product Offerings: Armstrong World’s growth strategy is largely dependent on acquisitions that expand access to additional markets. The company follows a systematic strategy for portfolio diversification. In December 2020, Armstrong World acquired Arktura, LLC, a designer and fabricator of ceilings, walls, partitions and facades.

On Aug 24, 2020, the company announced the acquisition of Moz Designs, Inc., a Northern California-based designer and fabricator of custom architectural metal ceilings, walls, dividers and column covers for the interior and exterior applications. On Jun 28, 2020, Armstrong World announced the acquisition of Turf Design, Inc., a Chicago, IL-based commercial interiors design house and maker of custom felt ceilings as well as wall solutions.

During first-quarter 2022, these acquisitions contributed to sales growth of 25.6% in Architectural Specialties unit.

Investments in New Products: Armstrong has been strategically investing in new products, sales and support services since its separation from the flooring business in 2016. It launched 35 products in 2020. In November 2020, it launched the AirAssure family of ceiling tiles. AirAssure is designed to reduce air leaks through the ceiling plane by up to four times over standard ceilings. Last November, the company paired the patented Vidashield ultraviolet air purification system with Armstrong ceiling panels to provide cleaner and safer air in pretty much any commercial space.

Superior ROE: Armstrong World’s superior return on equity (ROE) is also indicative of growth potential. The company’s ROE currently stands at 40.9%. This compares favorably with ROE of 11.6% for the industry it belongs to. This indicates efficiency in using its shareholders’ funds and Armstrong World’s ability to generate profit with minimum capital usage.

Causes of Concern

Higher Costs: Higher raw material costs owing to persistent inflationary pressure are hurting the company. To address this, the company introduced a continuous price increase in the past year.

This apart, it has been investing regularly in healthy spaces and digitization, which is ultimately increasing selling, general and administrative or SG&A expenses. In first-quarter 2022, its SG&A expenses rose 5.4% year over year due to increased spending on digital growth initiatives. Also, incremental costs relating to manufacturing, freight, labor and energy put pressure on the bottom line.

Project Delays: Armstrong World is likely to witness short-term project delays within the Architectural Specialties business, similar to new construction and major renovation Mineral Fiber projects, due to material and labor shortages that are impacting upstream building activity. The company is expected to generate a lower backlog in the near term.

During second-half 2021, the company witnessed project delays in both Mineral Fiber and Architectural Specialties segments. Although new construction and major renovation activity improved, it was uneven due to commercial construction labor disruptions and supply chain challenges, resulting in project delays. Although the condition is improving, the impact of these project delays is likely to remain a headwind and may put pressure on the bottom line.

Geopolitical Uncertainty: Prices for oil and natural gas are subject to fluctuations in response to relatively minor changes in the supply and demand for oil and natural gas, market uncertainty, and a variety of other economic factors. International markets that are closely linked to oil, such as the Middle East, will be impacted by oil price volatility and continued geopolitical uncertainty in the region.

Some Better-Ranked Stocks in the Broader Construction Sector

Beazer Homes USA, Inc. BZH currently sports a Zacks Rank #1. This Atlanta-based homebuilder continues to gain from solid operational execution and the continued strength of the housing market.

Beazer Homes’ earnings are expected to grow 48.9% in fiscal 2022.

NVR, Inc. NVR currently sports a Zacks Rank #1. The company is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis. To serve homebuilding customers, NVR operates a mortgage banking and title services business. NVR operates in two business segments: Homebuilding and Mortgage Banking.

NVR’s expected earnings growth rate for the current year is 68.4%.

TRI Pointe Group Inc. TPH currently sports a Zacks Rank #1. This Irvine, CA-based homebuilder designs, constructs, and sells single-family detached and attached homes in the United States. Robust demand and pricing and improved operating leverage have been driving TRI Pointe's performance. Cost-cutting initiatives implemented earlier this year and focus on entry-level buyers have been adding to the positives.

TRI Pointe’s earnings for 2022 are expected to grow 29.6%.


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