Armstrong Flooring: Stock Spinoff With Major Upside

| About: Armstrong Flooring, (AFI)


Trades below book value.

Acquisition candidate in consolidating sector.

EBITDA grew 10%+ in each of last two quarters.

The most interesting stock spinoff on my watch list right now is Armstrong Flooring (TICKER: AFI).

Here's the quick investment case:

AFI sells flooring material which is benefiting from a strong housing market. AFI was spun out of Armstrong as it was underperforming with revenue and EBITDA flat to down over the past three years. Management of AFI has been working to turn the business around and it looks like its having success. In each of the past two quarters EBITDA has grown double digits. This is significant as EBITDA declined 2% in 2015. While the flooring market has rebounded from its lows, it still remains 30% below peak levels of 2005.

On the margin front, AFI has much room for improvement. AFI has EBITDA margins of ~6.0% but management is excellent and has a plan to get margins back to ~10% range. In addition, the stock trades at an EV/EBITDA multiple of 7.0x while peers trade at ~11.0x. Assuming revenue grows 5% in each of the next three years, EBITDA margins expand to 10% and AFI's valuation expands to 11.0x EBITDA, the stock will trade at ~$42 (it trades at $16 now).

ValueAct (well regarding activist investor) owns 16% of the company and has a board seat. Raging Capital (hedge fund with ~20% annual returns since inception in 2006) also just announced it owns 6% of the company. Last point, the flooring market is consolidating. Mohawk Industries, the market leader, has spent $3.5bn on acquisitions and has historically acquired smaller competitors at an EV/Revenue multiple of 1.7x to 2.6x. AFI currently trades at 0.4x.

I will follow up with a more detailed investment case, but wanted to share my initial thoughts.

Disclosure: I am/we are long AFI.

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