Don’t Invest In The Housing Market; Buy American Woodmark On The Cheap – Seeking Alpha

Company Description

American Woodmark (NASDAQ: AMWD) is a manufacturer and distributor of kitchen cabinets for the remodeling and new home construction markets. The company offers approximately 500 cabinet lines, with 85 door designs in 21 colors, offering a wide range of products. Based in Virginia, the company serves customers through home centers, home builders, and independent dealers, while offering installation services through seven service centers located across the United States. (2016 Annual Report)

(click to enlarge) (Original Content, Data from AMWD Investor Relations)

The management team, led by CEO S. Cary Dunstan, has an average of 22 years of experience in a variety of industries. Since 2013, management has achieved significant growth in returns, highlighting the importance of skilled team. William Brandt, Jr., the company's original CEO, still owns 12% of the company, and 64% of employees own shares in the company - significant insider ownership like this is usually a sign of a healthy company, and ensures the firm's interests are aligned with shareholders.

Investment Thesis

The first reason to buy American Woodmark is to take advantage of these favorable trends - the housing market has grown at a CAGR of 12.3% since 2009, and has not yet breached the historical average, which is expected to occur next year in the wake of plentiful consumer credit and increased consumer confidence. (US Census Bureau) As the economy recovers, kitchen remodeling is a popular investment for consumers - it offers one of the best ROIs of any renovation at approx. 74-83%. (MoneySense)

(click to enlarge) (Original Content, Data from US Census Bureau)

The second reason to buy American Woodmark is its industry-best asset base and management team. Despite the fact that 40% of the company's assets are in the form of cash, it still achieved a 13.57% ROA last year, compared to a peer average of 7.43%. The company stepped up CapEx in recent years, growing it at a CAGR of 43.9% since 2012, and has invested in a pool of high-quality property, plant, and equipment, allowing it to outperform. Through management's skilled investment, the company achieved a ROIC of 21.47% compared to a 12.96% return from peers. (Bloomberg) This ROIC is well above AMWD's cost of capital, allowing the company to continue generating value long-term.

(click to enlarge) (Origianl Content, Data from Bloomberg Terminal)

Industry Outlook

In the US, the Cabinet Manufacturing sector has been recovering since the collapse of the housing market in 2008. After reaching a high of 1,800,000 starts in 2006, the market collapsed to 554,000 in 2009, and has yet to recover to the 50-year average of 1,442,000. The industry is expected to grow 2.3% in 2017 as renovation, which drives two-thirds of demand for cabinets, rises with increases in consumer confidence and a low rate of unemployment.

The competitive landscape is relatively fragmented; the three largest companies account for just 28% of revenue - the largest companies are Fortune Brands Home & Security (NYSE: FBHS)(15.4%), American Woodmark (6.6%), and Masco (NYSE: MAS) (6.3%). However, 80% of companies in the industry have fewer than 10 employees, and lack a distribution network necessary to expand and provide a credible threat to industry giants.

Valuation

Despite its peer outperformance, American Woodmark is trading at a significant discount most multiples. Peers are trading at 22x LTM Price/Earnings, while American Woodmark is trading at 19x, implying a 14% return. Peers are also trading at 11x LTM EBITDA, while American Woodmark is trading at 9x, implying a 16% return. (Bloomberg)

Catalysts and Risks

Catalysts

Risks

(click to enlarge) (Original Content, Data from Bloomberg Terminal)

Recommendation

My recommendation for American Woodmark is a BUY. The company is trading at $77.40 right now, with an average analyst price target of $88.77. My price target based on multiples and project cash flows is $87, implying a healthy 12% return for investors.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please perform your own research before making any investment decisions. This is for educational use only and does not constitute investment advice. All analysis is the opinion of the author.

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Don't Invest In The Housing Market; Buy American Woodmark On The Cheap - Seeking Alpha