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Armstrong World (AWI) Rides on Acquisitions Amid High Costs

Zacks Equity Research

Armstrong World Industries, Inc.’s AWI strategic inorganic moves, solid price realization and volume growth bode well. Also, solid segmental prospects and favorable average unit values ("AUV") are adding to the bliss.

Shares of this leading global producer of ceiling systems have broadly outperformed the industry so far this year. The stock has gained 68.6% compared with the industry’s 32.8% rally in the said period. Earnings estimates for 2019 have been trending upward over the past 60 days, reflecting analysts’ optimism surrounding the company’s growth potential.

However, higher freight and raw material costs, and lower volumes in the Mineral Fiber segment due to inclement weather are pressing concerns.

Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

Substantial Growth Drivers

Armstrong World’s business has been gaining momentum and growing significantly faster than the underlying market. The company has been generating strong revenues and earnings over the last few quarters. It reported sales growth of 8% and 25% improvement in adjusted earnings per share in first-half 2019. Also, adjusted EBITDA margin expanded 240 basis points (bps) on a year-over-year basis in the said period.

Acquisitions have also been a key growth driver for the company. Its recent acquisition of Architectural Components Group, Inc. (“ACGI”) boosted the existing wood ceiling and wall solutions business. Armstrong World expects this acquisition to add $20-$25 million to total sales in 2019.

The company has been strategically investing in new products, sales and support services, as well as advanced manufacturing capabilities. Since the separation from the flooring business in 2016, Armstrong World launched various new products that have experienced astonishing adoption rates by architects. Notably, these products are expected to pay off in 2019 and beyond.

Apart from buyouts and the launch of new products, the company has been implementing higher prices to mitigate excessive cost pressure. Going forward, Armstrong World is expected to maintain its pricing power in ceilings, based on strong distribution network and innovation.

Moreover, the company expects 2019 net sales to be at the higher end of the previously guided range of 7-10%.

Major Concerns

Armstrong World has been experiencing higher raw material and freight costs. Increased steel and aluminum tariffs continue to impact its overall results. Although the company has undertaken certain initiatives to offset these rising costs, we remain concerned about Armstrong World’s bottom-line prospects.

Soft volumes in the Mineral Fiber segment due to weakness in Latin America, the Big Box channel, and weather-related woes in the upper Midwest and parts of Canada are putting pressure on profitability.

Moreover, its stretched valuation is another concern. The company’s trailing 12-month price to earnings (P/E) ratio is 22.94, which is higher than the industry’s 14.36.

Stocks to Consider

Some better-ranked stocks in the same space are frontdoor, inc. FTDR, Quanex Building Products Corporation NX and Aegion Corporation AEGN. While frontdoor and Quanex sport a Zacks Rank #1 (Strong Buy), Aegion carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Frontdoor’s long-term earnings growth is projected at 15.5%.

Quanex’s earnings for the current year are expected to grow 46.2% year over year.

Aegion’s long-term earnings are anticipated to rise 10%.

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