It has been about a month since the last earnings report for Armstrong World Industries (AWI). Shares have lost about 6.1% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Armstrong World Industries due for a breakout? 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 Misses on Q1 Earnings, Cancels '20 View
Armstrong World Industries, Inc. reported first-quarter 2020 results, wherein both earnings and revenues missed the Zacks Consensus Estimate. While the bottom line missed the consensus mark after beating in the trailing four quarters, the top line lagged the same for the fifth straight quarter. However, both the top and bottom lines improved year over year. The company revoked 2020 guidance on account of the coronavirus pandemic.
Earnings & Revenues Discussion
The company reported adjusted earnings of $1.10 per share, lagging the Zacks Consensus Estimate of $1.14 by 3.5%. However, the reported figure improved 10% year over year.
Although net sales of $248.7 million lagged the consensus mark of $256 million by 2.7%, the figure improved 2.7% year over year on the back of increased volumes in the Architectural Specialties segment and higher Mineral Fiber volume. However, growth was marginally overshadowed by unfavorable Mineral Fiber average unit value (“AUV”) owing to volume growth in Latin America and the Big Box channel, which have lower AUV than the Mineral Fiber segment average.
Selling, general and administrative (SG&A) expenses decreased 37.4% year over year to $34.8 million in the quarter.
Adjusted EBITDA advanced 5.4% from the prior-year quarter to $97 million. The company recorded EBITDA growth in 40 of the trailing 41 quarters, highlighting the stability of business. EBITDA margins expanded 90 basis points (bps) in the quarter.
Adjusted operating income increased 2.6% year over year to $78 million driven by manufacturing productivity, lower SG&A expenses and volume growth in the Architectural Specialties segment.
Mineral Fiber (accounting for 79.5% of net sales): Backed by higher volume, the segment’s sales were up 0.5% on a year-over-year basis to $197.7 million, partly offset by unfavorable AUV.
Operating income increased 47.1% from the prior-year quarter, attributable to a $20 million decline in legal and professional fees related to the 2019 litigation matter with Rockfon and a $4 million decrease in manufacturing costs. Adjusted EBITDA also grew 6.1% from the prior-year quarter to $87 million due to robust performance of manufacturing operations.
Architectural Specialties (20.5%): Net sales in the segment grew 12.3% year over year to $51 million, courtesy of higher sales volumes from the recently acquired ACGI, marginally offset by unfavorable project timing.
The segment’s operating profit declined 18.1% year over year due to additional investments in selling and design capacities, and the integration of acquisitions, partially negated by the positive impact of higher sales volume. Moreover, adjusted EBITDA of $8 million decreased 2.1% from the year-ago level.
Notably, unallocated corporate expense of $1.5 million, declined from $2.1 million in the prior-year quarter.
As of Mar 31, 2020, Armstrong World had cash and cash equivalents of $146.9 million compared with $283.8 million in the comparable period of 2019.
Net cash provided by operations was $25.7 million in the reported quarter compared with $14.7 million in the prior-year quarter.
The company’s free cash flow (on an adjusted basis) was $36 million during the quarter compared with $18 million in the year-ago quarter.
Demand in April declined due to the ongoing coronavirus-induced crisis. The scenario has compelled the company to take proper measures to reduce production and manage inventory. It also continues to maintain service levels. Further, the company is taking care of its supply chain so that sufficient raw materials and finished goods are available at appropriate locations.
In an effort to reduce costs in view of the current scenario, the company has trimmed spending, suspended hiring, and delayed non-essential and non-growth oriented capital investments. The company has also suspended share repurchase program.
Although the company has withdrawn guidance for 2020, it anticipates generating a free cash flow margin of 22-25% this year.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -29.34% due to these changes.
At this time, Armstrong World Industries has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Armstrong World Industries has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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