AMWD Stock Study (6-13-23)

Posted by Mark on July 1, 2023 at 06:59 | Last modified: June 13, 2023 15:19

I recently did a stock study on American Woodmark Corp. (AMWD) with a closing price of $69.56.

Value Line writes:

     > American Woodmark Corporation manufactures and distributes kitchen
     > cabinets and vanities for the home construction and remodeling
     > markets. The company offers 550 cabinet lines in a wide variety of
     > designs, materials, and finishes, ranging from low to mid-tier
     > prices under the American Woodmark, Simply Woodmark, and other
     > brands. Acquired RSI Home Products, 12/17. Home Depot and Lowe’s
     > accounted for 48% of sales in fiscal 2021.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 12.8% and 12.6%.

Critical to the analysis is that the latter excludes -$1.79/share ’21 (FY ends April) EPS. With ’21 included, the EPS historical growth rate is -21.8%. I would reject that based on visual inspection. A closer look at the 10-K reveals a major contributor to the down year is a $65.8M pension settlement:

     > Prior to April 30, 2020, the Company had two non-contributory
     > defined benefit pension plans covering many of the Company’s
     > employees hired prior to April 30, 2012. Effective April 30, 2012,
     > the Company froze all future benefit accruals under the Company’s
     > hourly and salaried defined benefit pension plans. Effective April
     > 30, 2020, these plans were merged into one plan. Effective December
     > 31, 2020 the Plan was terminated in a standard termination and
     > benefits were distributed on December 2, 2021.

Adding back this one-time charge results in EPS of $2.33/share, which is at least positive and keeps much of the growth story intact. One thing I don’t like is the company’s “adjusted net income,” non-GAAP presentation, and “add backs” in every 10-K since 2018. Even though the items may be different, breaking this out annually makes me tempted to disregard all of it and just use GAAP, which for this stock does not clear the barbed-wire fence.

“Cost of Sales and Distribution” is also higher in ’21:

     > The decrease in gross profit margin was primarily due to higher
     > material and logistics costs, and increases related to wage and
     > retention programs. This was partially offset by the increase in
     > sales creating leverage of our fixed expenses in our operating
     > platforms.

This $117M impact, for which management may be on the hook, is almost double that of the pension settlement.

I will continue the study with ’21 data excluded. You can decide for yourself, of course.

Even without ’21 EPS, visual inspection is not pristine. Sales are up and mostly straight. EPS are down in ’17, ’19, and ’20, which gives somewhat of a rocky appearance.

Over the past decade, PTPM has gone from 4.6% in ’13 to 10.6% in ’16 before falling back to 5.9% in ’22 for a last-5-year mean of 5.8%. This is mostly below peer and industry averages.

Also over the past decade, ROE has gone from 11.2% in ’13 to 21.5% in ’16 before falling back to 11.1% in ’22 with a last-5-year mean of 10.7%: lower than peer averages and roughly even with the industry. Debt-to-Capital has gone from 10.2% in ’13 to 4.6% in ’16 before spiking to 58.3% in ’17 and trending down to 35.4% in ’22 for a last-5-year mean of 46.1%. This is lower than peer and industry averages.

Interest Coverage is 7.5, Quick Ratio is 0.97, and Financial Strength is B+ according to Value Line who writes:

     > Cash flow is positive. Operating needs are largely covered and
     > the company has ample liquidity ($365 million), providing
     > strategic and capital allocation flexibility. Share buybacks
     > are being considered for fiscal 2023 and/or 2024.

With regard to sales growth:

• CNN Business projects contraction of 14.3% YOY and 4.9% per year for ’23 and ’22-’24 (based on 6 analysts).
• YF projects YOY 11.3% contraction and 4.0% growth for ’23 and ’24, respectively (6 analysts).
• Zacks projects YOY 9.0% contraction and 4.7% growth for ’23 and ’24, respectively (2).
• Value Line projects 1.8% annualized growth from ’22-’27.
• CFRA projects contraction of 11.3% YOY and 3.4% per year for ’24 and ’23-’25, respectively (6).
• M* provides a 2-year ACE of 2.4% contraction per year.

Only a projected slowdown in ’23 is unanimous. After that, it’s really anyone’s guess what the supposed recovery will look like. I am forecasting less than the one long-term estimate at 1.0%.

With regard to EPS growth:

• CNN Business projects contraction of 12.1% YOY and 2.2% per year for ’23 and ’22-’24, respectively (based on 6 analysts), along with 5-year annualized growth of 22.6%.
• MarketWatch projects 4.6% YOY contraction and 1.9% growth per year for ’23 and ’22-’24 (6 analysts).
• Nasdaq.com projects 3.7% YOY growth for ’25 (2).
• Seeking Alpha projects 4-year annualized growth of 22.6%.
• YF projects YOY 12.5% contraction and 8.4% growth for ’23 and ’24, respectively (6), along with 5-year annualized growth of 20.9%.
• Zacks projects YOY 21.9% contraction and 3.7% growth for ’23 and ’24, respectively (2).
• Value Line projects 8.9% annualized growth from ’22-’27.
• CFRA projects growth of 18.7% YOY and 11.8% per year for ’24 and ’23-’25 (6) [their ’23 is what M* labels as ’22].

I am forecasting toward the bottom of the long-term-estimate range (mean of four: 18.7%) at 9.0%.

Seeking Alpha and CNN Business have identical estimates, which is somewhat perplexing because CNN Business uses FactSet data and Seeking Alpha uses S&P Global Intelligence. I see this periodically when doing stock studies.

My Forecast High P/E is 16.0. Over the past decade, high P/E has trended down from 30.5 (’13) to 10.8 (downside outlier in ’22) with a last-5-year mean of 22.8 (’21 is NMF and ’17 is 39.4: possibly due to TCJA). The last-5-year-mean average P/E is 16.3. I am forecasting below the latter (only ’22 is less).

My Forecast Low P/E is 7.0. Over the past decade, low P/E has trended down from 22.8 in ’13 to 7.2 in ’22 with a last-5-year mean of 9.7 (’21 is NMF and ’17 is 20.9: possibly due to TCJA). I am forecasting below the range.

My Low Stock Price Forecast (LSPF) is the default value of $39.30. This is 43.5% less than the previous closing price and 3.4% less than the 52-week low.

These inputs land AMWD in the HOLD zone with a U/D ratio of 2.3. Total Annualized Return (TAR) is 14.7%.

PAR (using Forecast Average—not High—P/E) is 7.4%, which is less than I like to see for a medium-size company. If a robust margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I usually compare my inputs with those of Member Sentiment (MS) but for this stock the sample size is too small. Based on only 3 studies over the past 60 days (3 outliers including mine excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 11.3%, 12.0%, 24.1, and 13.5, respectively. I am lower across the board. Value Line projects an average annual P/E of 13.0, which is lower than MS (18.8) and higher than mine (11.5).

MS high and low EPS are $9.61/share and $4.34/share compared to my $8.65 and $5.62. My high EPS is lower due to a lower EPS growth rate. As for low EPS, one MS study uses $5.62/share. The two others use $3.57/share and $4.34/share, which are precise matches to ’15 and ’16 EPS, respectively. Interesting…

MS Low Stock Price Forecast (LSPF) of $68.30 implies a low P/E of 15.7 (vs. the above-stated 13.5). This is 16.6% greater than the $4.34 * 13.5 = $58.59 default value, which results in higher-risk zoning. MS LSPF is also 73.8% higher than mine. This is puzzling. Looking closer, all three studies use LSPF higher than the actual closing stock prices on the day they were done. Those would be invalid.

While I cannot legitimately draw any conclusions in comparing with such a small MS sample size, I do think MOS is robust when taking into account growth and valuation projections from Value Line and other analyst estimates.

One thing that gives me pause about this stock is a low Value Line Earnings Predictability score of 55. This also appears in the Audit section as R^2 of 0.10 and 0.60 for the last 5 and 10 years, respectively. Does AMWD have a high probability of growing earnings consistently into the future?

With a high TAR and robust MOS, I would be a buyer under $64/share.