It has been about a month since the last earnings report for Armstrong World Industries (AWI). Shares have added about 4.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Armstrong World Industries due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Armstrong World's (AWI) Q3 Earnings Beat, Revenues Miss
Armstrong World Industries, Inc. reported third-quarter 2019 results, wherein earnings surpassed the Zacks Consensus Estimate, while revenues missed the same.
The company reported adjusted earnings of $1.38 per share, surpassing the consensus estimate of $1.30 by 6.2%. Also, the reported figure increased 20.1% from $1.15 per share in the year-ago quarter.
Although its net sales of $277.1 million lagged analysts’ expectation of $289.5 million by 4.3%, the figure increased 6.4% year over year, driven by increased volumes in the Architectural Specialties segment and higher Mineral Fiber average unit value (“AUV”) on the back of positive like-for-like pricing and favorable mix.
Selling, general and administrative (SG&A) expenses increased 17% year over year.
Adjusted operating income increased 13.1% year over year to $95 million, mainly driven by positive Mineral Fiber AUV, volume growth in the Architectural Specialties segment and higher equity earnings from its WAVE joint venture. Adjusted EBITDA also improved 13.4% year over year to $114 million.
Mineral Fiber (accounting for 78.9% of net sales): The segment’s sales were up 2.7% on a year-over-year basis to $218.6 million, backed by higher AUV and volume.
Operating income grew 44.2% from the prior-year quarter, attributable to higher equity earnings from WAVE, increased sales and lower SG&A expenses. Adjusted EBITDA also grew 12.7% from the prior-year quarter to $99 million.
Architectural Specialties (21.1%): Net sales in the segment grew 22.6% year over year to $58.5 million, courtesy of higher volumes owing to increased market penetration. Acquisitions of Architectural Components Group, Plasterform and Steel Ceilings also added to the positives.
The segment’s operating profit improved 2.7% year over year, primarily on the back of higher sales volume, partially offset by more investments in selling and design capacities. Moreover, adjusted EBITDA of $14 million increased 18.1% from the year-ago level.
Notably, Unallocated Corporate expense of $1.8 million was flat year over year.
As of Sep 30, 2019, Armstrong World had cash and cash equivalents of $98 million compared with $337 million in the comparable period of 2018.
Net cash provided by operations was $74 million in the third quarter compared with $70 million recorded in the year-ago period.
The company’s free cash flow (on an adjusted basis) was $99 million during the quarter compared with $74 million in the prior-year period.
Given its robust pipeline and focus on actively expanding strategic capabilities, Armstrong World expects mergers and acquisitions activity to continue. The company also announced another acquisition recently, marking its fifth one in the last three years. It is to be noted that the company’s board approved a 14% increase in quarterly dividend. Encouragingly, it expects to continue the trend of increasing free cash flow at double digits.
Armstrong World has tightened its 2019 guidance. It now expects sales in the range of $1.04-$1.05 billion, indicating an annual growth of 7-8%, backed by volume gains in Architectural Specialties, AUV expansion in Mineral Fiber and acquisitions. However, upper range of the said growth rate is lowered from the prior expectation of 10%.
The company expects adjusted EBITDA between $400 and $405 million, suggesting 13-15% growth from a year ago.
How Have Estimates Been Moving Since Then?
Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -8.15% due to these changes.
At this time, Armstrong World Industries has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Armstrong World Industries has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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