Armstrong World Industries: A Housing Related Stock with Upside?

Armstrong World Industries (AWI) is my single favorite idea at the moment.

Armstrong is an industrial company that specializes in flooring and ceiling products. If you’ve ever seen hardwood flooring at Home Depot (HD), you’ve seen the Armstrong brand. Armstrong came out of bankruptcy late last year after settling asbestos litigation. As a condition to re-emerge, the company gave 37 million shares, or 65% of the float, of its new stock to the asbestos trust that would be paying asbestos claims. In addition, Armstrong emerged from bankruptcy with 1.6 billions dollars of NOLs and a pension that was overfunded by 600mm dollars. And to top it all off, at the end of q42007, AWI will be in a zero net debt position. The company has stated in the past that 2-3x EBIDTA is a comfortable amount of debt to take on.

The company is split approximately 50/50 in residential and commercial end-markets. The worries about their residential business are somewhat overblown because about 65% of their residential business is replacement vs. new construction. So, essentially, you’re talking about 5-6% exposure to new home construction. Meanwhile, despite the turmoil in the housing market, the company has managed to improve their operating results by improving manufacturing efficiencies and instituting price increases.

In the early part of this year, the company announced that they were going to be conducting a strategic review. The stock rocketed to $57 over the next couple weeks amidst the LBO boom and then July hit. This stock, along with all the other stocks that were trading at 30-40% premiums on LBO speculation, got crushed. AWI was quadruply-cursed: a housing related stock, a management that does not openly promote itself, a possible LBO candidate, and supremely illiquid. It traded down to the mid-$30s, at which point, if you were smart enough, you would have purchased a company trading at near 8x cash flow.

Today, at $40, it is one of my favorite ideas. The company is still pursuing its strategic review - a complex process in their case as they have many options including selling some assets to a strategic buyer with an underfunded pension, doing a leverage recap, purchasing stock from the trust, or all of the above. In my opinion, the company is still trading at close to an 11% FCF yield without accounting for a present value of 180mm in NOLs and the 600mm in pension overfunding. In a best case scenario, the company makes a deal with the asbestos trust to purchase stock back from them - allowing them to buy back half the market cap of the company without being overleveraged (I think this gets you a stock in the high $50s/ low $60s). In a worst case scenario, I think you end up with a company that continues going about business as usual with minimal downside and continuing to provide over 200mm in FCF each year.

Disclosure: I am long AWI. Please do your own research before acting.

Comments

[Mr.BubbleBuster]

Interesting article. If you have lots of money to shoot craps with, then I agree that you should throw all your money into this stock. Good Luck.
This GREEDY CEO Micheal Lockhart & his other 5 cronies will do WHATEVER it takes for them to collect their $55 million dollars, even if it takes cutting their grandmother's throat.
They are the biggest bunch of IDIOTS that I have ever seen that think they can manage a company. Lockhart is the first outsider to be CEO that did not come up through the ranks of the company. Lockhart was handpicked by George Lorch, another CROOK that sits @ the table for Pizer now.(Wonder why healthcare is so screwed up)
Lorch sold his stock @ $90 a share right before it plummeted. Talk about insider trading. I can't understand why the IRS NEVER investigated Lorch on his evil deals. Martha Stewart ain't got nothing on George Lorch!
So Lorch handpicks this CROOK LOCKHART so that he can takeover as CEO & take the company through bankruptcy.
They emerge from chapter 11 & now lawyers own most of the company.
They have had several companys or private equity firms look at them but wouldn't touch it with a ten foot pole.
So the question is: Are they really free of asbestos litigation?
The answer is NO.
The asbestos fund CAN NEVER RUN DRY. Where does this fund get it's money from? It comes from Armstrong World Industries(AWI)
Armstrong is a leader in Gobalization that started back around 1968.
Armstrong like alot of other so-called american companys should be placed on the Terrorist watch list!
Armstrong Holdings (AHI) just gave me my 69 cents a share for my investment, God bless them. So go ahead & put all your money in their stock & see what you get back.
Armstrong was once a good company that was founded around 1868. It is a shame & a disgrace to this country that we allow them to ruin a good company. But hopefully they will fold & become HISTORY!
The ceiling tile business is the only part that makes them any money. Will they bust up the company to sell so Lockhart & buddies can collect their $55 million. Whatever it takes!
Why Armstrong is only worth 4 billion. Dollar General is worth more than them @ 7 billion.
So what about it Mr. Buffet? Are you ready to gamble.

p.s. Forget about the Housing crisis , just wait until the CREDIT MELTDOWN kicks in around 2008.

[baycommuter]

talk about bitter, bubblebuster. if you'd been smart enough to know somethng about bankruptcy court, could could have owned the preferred instead of AHI and made a nice profit, as several of us did.

[BrianGriffin]

@bubblebuster - that was quite the comment. unfortunately, i have no response and continue to own AWI

[Mr.BubbleBuster]

So you need more lowdown on AWI?
Some of us had no choice with AHI.
Even if they gave me any I would dump it right now.
It has only one direction----DOWN!

Today Jan. 8 2008 what is your stock @? 37.07
Issued @ $40 a share. When did you buy in at.
I know your in it for the long haul.
Guess what. They are starting to lay off all across the world.
They plan to sell cabinets & flooring and buy stock back from lawyers.
But it still leaves them with the asbestos issue!

Believe me Hoss, I know all about bankruptcy.
There is no such thing as chapter 7 anymore after 2005.
Chapter 13 or 11- YOU will pay back everything you owe till the day you die!
So just take out that 2nd mortgage and be sure to max out all your credit cards.

Welcome back to days of the Great Depression.
Feel like a Frog? JUMP!

Gas now @ 3.11 a gallon. Wait until it's around $10
Try to retire on a fixed income with Health insurance increasing forever.

That is even if you have it now, it will not be around for you then.
So much for the so-called American dream.

The Next Generation ain't gonna ask for what they want...
They are just gonna TAKE IT!

[Mr.BubbleBuster]

P.S. If You do have alot of money-
Then that makes you a TARGET

[Mr.BubbleBuster]

P.M.S.
Remember LOCKHART said " The asbestos fund CAN NEVER RUN DRY"!

[Mr.BubbleBuster]

From what I understand, even their top talent in management are starting to bail out on the company now that they see what is happening. So I would take a wild quess that the product quality might suffer.
Crunch the numbers and it just doesn't add up to healthy future for a company.