American Woodmark: A Contrarian Bet With ~100% Upside

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About: American Woodmark Corporation (AMWD), Includes: HD, MAS
by: GS Analytics
Summary

American Woodmark is trading at ~8x current year P/E, which is very low for a company with a history of gaining market share and delivering above market growth rates.

The company’s new opening price point product and entry in multifamily market can help it offset any slowdown in the housing market.

Tariff is not a big concern as it plans to replace a part of its China sourcing by producing some of its core products at RSI’s Mexico facility.

We see ~100% upside if housing starts stabilize and ~50% upside if we enter a housing recession with the impact of recession getting offset by market share gains from new products.

After making an all-time high of $148 in early 2018, American Woodmark’s (AMWD) stock price has declined more than 60% due to concerns over imminent housing recession and tariffs. The stock is now trading at ~8x current year P/E, which is very low for a company with a history of gaining market share and delivering above market growth rates. I believe these concerns are overblown as:

  1. Even if we enter a housing recession, there are company-specific drivers like market share gains from new opening price point product and entry in multifamily segment which can help the company post meaningfully better sales growth than end markets.
  2. Post RSI acquisition, the company now has three low-cost manufacturing facilities in Mexico. American Woodmark was already planning to replace a part of its China sourcing by producing some of its core products at RSI’s Mexico facility. So, it is in a position to respond much quickly to any tariff hikes as compared to competition and there is no capex requirement for the same.
  3. Housing starts at 1.25 mn per year are still much below their historical average of 1.5 mn per year. If we look at the data since 1960, never ever has a housing cycle peaked below 1.5 mn housing starts. We simply haven’t seen a period of overbuilding which precedes a period of under building. So, a housing recession looks unlikely.
  4. Post RSI acquisition, the company now derives ~62% of its sales from remodeling which is up meaningfully from pre-acquisition levels (~48%). Remodelling sales are much less cyclical than new construction and if we go by commentary from Home Depot (HD) at its latest sell-side meet, trends in home improvement remain “rock solid”.

Secular Growth vs. Cyclical Fears

American Woodmark derives ~38% of its revenues from new construction. So, it is natural for investors to worry about the state of housing end-market, and it is getting reflected in the stock price. However, investors are ignoring two company-specific drivers – (i) market share gains from the new opening price point product and (ii) entry into multifamily segment - which can help it meaningfully outperform the market and offset any slowdown even if we enter another recession.

One of the main reasons behind American Woodmark’s RSI acquisition last year was RSI’s opening price point product. Over the last couple of years, there has been a shift towards lower priced homes to meet the demand from first-time home buyers. Most of the nation’s top builders are now launching homes for these entry level-buyers. While American Woodmark was seeing interests from builders for entry level product previously, selling its existing Timberlake brand at such price point would have meant taking a hit on the margins and impacting its brand positioning. So, the company decided against pursuing this business. This resulted loss of sales from this demography, and the company even lost a national level builder client in Q1 FY2018 (ended July 2017) for the same reason.

However, after acquisition of RSI, which has a low complexity (lower SKU count, high volume) platform focused on opening price point products, the company can address this market profitably (RSI's pre-acquisition adjusted EBITDA margins were ~21.8% as compared to American Woodmark's 12.3%). Before acquisition, RSI had little exposure to new construction with only ~11% of its sales coming from this market. After working on integrating and ramping up RSI’s manufacturing facilities, American Woodmark has now began using RSI’s low cost platform to address entry level housing demand and has launched Origins by Timberlake in Q1 FY2019 (ended July 2018). The product is generating immense response from the builders, and the company is signing new contracts almost every week. Answering a question on the last earnings call, the company’s Chairman and CEO Cary Dunston commented,

So we’ve got some nice wins almost really every week we are having nice wins, we’ve had key customers actually visiting both of our central locations in Lincolnton and Anaheim California, Lincolnton North Carolina, Anaheim California. I think but not only impressed, but probably the word to me is that the size and scope of our operations are going to - the efficiency of the operation, it has nice dimension when you have builder walk-in and really understand how sophisticated an operation we have and you're out there supplying this origin product and that obviously then flows through our direct-to-builder network, we would are very used to it.

So it’s been a big win for us and it’s just going to ramp up right now and yes, we are really well positioned to go out and as that market grows, we’re being very aggressive in bidding on opening price point projects and any projects that fit that value based proposition that we now offer.”

Opening price point products belonging to in-stock and stock category accounts for ~10% and ~32%, respectively, of the total kitchen cabinet sales in the U.S. Prior to RSI acquisition, American Woodmark was primarily present in stock plus (~75% of pre-acquisition sales) and upper end of stock category (~25% of its pre-acquisition sales). RSI acquisition has doubled the company’s addressable market size, and it can now cater to the demand for in-stock and low and mid-range of stock category.

(Note: In-stock category offers basic door styles, finishes and box sizes while Stock category offers frameless line with broad selection of door styles, finishes, drawer boxes and accessories. Stock plus utilize higher grade materials and offers more options)

Chart1: Product segment breakdown of the U.S. Kitchen cabinet industry (2019 total industry sales estimate ~$15 bn)

Source: Company presentation (management has used industry estimates from Freedonia Group), GS Analytics estimates

American Woodmark’s execution is one of the best in the industry. The company’s industry leading service platform enables it to deliver exceptional service to its builder partners, and it has gained significant market share in the past. The following chart shows the company’s builder sales growth versus single family housing starts (end market growth) since Q1 2013.

Chart 2: American Woodmark’s Builder Sales growth versus single family housing starts*

Source: Company data, U.S. Census Bureau, GS Analytics estimates (*Since there is ~60 days lag between a home construction starting and American Woodmark selling kitchen cabinet, single home starts in chart correspond to period ending 60 days prior to AMWD’s quarter end.)

The company’s builder business has outperformed new construction end market by an average of 13.29 percentage point per quarter from Q1 2013 to Q1 2018. Even if we remove 2013 and 2014, when the outperformance was exceptionally high, the company outperformed new construction end-market by an average of 9.39 percentage points per quarter from Q1 2015 to Q1 2018.

However, over the last couple of years, as the market shifted towards entry level home buyers and the company decided not to pursue this business (losing a national builder client in Q1 2018 as a result), its builder business started underperforming new single family housing starts. On an average, the company’s builder business underperformed new construction end-market by 289 bps per quarter from Q2 2018 to Q1 2019. The company’s builder business returned to slight outperformance (200bps according to my estimates, 300bps according to management) in Q2 2019 as it lapped client loss of the previous year and the comparisons eased. Looking forward, as the company’s entry level product gains traction, its new construction business can start meaningfully outperforming end-market growth over the next few quarters.

In addition to entry level price point in single family housing, RSI’s platform also opens the door for American Woodmark to compete in multifamily market. American Woodmark has traditionally served only single family homes with almost negligible market share in multifamily new construction market.

Multifamily housing represent approximately one-third of new construction business and out of 1,256,000 new housing starts in November, 417,000 were buildings with five units or more. The company has already started hiring sales managers in three of its seven primary service centers to target this market (see advertisement below).

Multifamily tends to be a lower cost market, with more contractual base and longer-term life-cycle. It took American Woodmark ~6 months to develop Origins product, and I expect similar timeline for multifamily product as well. So, I am anticipating a product launch in mid-2019. While the ticket size (per housing unit) will be smaller as compared to single family housing, I expect margin to be at higher levels as the company will be using RSI's low complexity platform for this market. (Management hasn't given much discrete information on margins as it is still initial stages, but we can expect more color over the next two quarters.) In terms of competition, this market is dominated by smaller players and American Woodmark's service platform can be a key differentiator.

While I believe it will be a 2020 rather than 2019 event (as multifamily projects have more lead times), the entry in this market can help the company meaningfully outperform new construction end markets over the next decade.

In both these cases (entry level as well as multifamily), the company can use its existing manufacturing and service platform. So, there is not much additional cost associated with these launches. In entry-level housing, the company already has its sales force for single family units and just has to gain share with its Origins product. On the multifamily side, where the company is hiring sales managers, it will still be using the same manufacturing and service platform. So, not much additional cost there either.

At the time of RSI acquisition, management guided for $40 mn of annual run rate EBIT synergies phased over three years, out of which ~70% were going to come from sales. Since RSI already had a significant home center presence, most of this synergy was going to come from new construction. As of the last quarter, management continues to feel very comfortable about that target. Answering a question on its last earnings call (Nov. 29, 2018), the company’s CEO Cary Dunston commented,

“And then on the synergy side with revenue obviously we talk about origins, we'll provide more detail on that as it becomes more significant, obviously all this is a ramp up. We are ramping it up and as we get into Q3, but probably more likely Q4 we'll start to give you a little more color on where we are specifically on the revenue synergies. I will say we feel very comfortable with our commitment. You know obviously that $40 million we committed, we said about 70% of it will be through revenue, we continue to feel very comfortable with that.”

Since one year has already passed after RSI acquisition, we are talking about $28 million in additional EBIT over the next two years from new products. Assuming 25% incremental margins, we are talking about $112 mn in additional sales over the next two years or $56 mn per annum in additional sales. [Calculation: Additional Sales*25% = $28mn, additional sales = $28mn/0.25 = $112 mn.]

This equates to ~8.75% per annum additional growth in the new construction business (American Woodmark’s new construction sales are ~$640 mn). Even if there is a recession, and the new housing starts were to decline at low double-digits rate, the company can offset most of this decline from market share gains of opening price point and multifamily products.

So, the fear around American Woodmark's new construction exposure seems overblown. Once management starts giving more color on new product sales over the next couple of quarters, it will help investors better understand the company’s prospects and serve as a catalyst for the stock.

Tariff Woes or Opportunity

Another big concern among the company’s investors is tariff. American Woodmark’s ~$56 million of imports from China are subjected to 10% tariff that went into effect on September 24. While a proposed hike in tariff to 25% is postponed by 90 days, uncertainty still remains regarding what will happen after March 31.

I believe these concerns are not valid. With RSI’s acquisition last year, the company also gained three low-cost manufacturing facilities in Tijuana, Mexico which have greater speed-to-market and transportation cost advantage over Asian manufacturers, in addition to low-labor cost. The company was already planning to replace a part of its China sourcing by shifting production of some of its core products at its Mexico facility. So, it is in a position to respond much quickly to these tariff hikes as compared to its competition and there is no new capex requirement for the same. Answering a question regarding tariffs on its recent earnings call, American Woodmark's CEO Cary Dunston commented,

"... our purchasing teams are working very, very aggressively and the nice thing for us versus some of our competition is we do have a low cost manufacturing platform in place in Mexico already.

There's no capital cost associated with moving that material (Chinese sourcing) to our Mexican operations is just matter of relocating it. So we're resourcing that. So we're in the process of doing that."

Management expects to offset approximately half of the potential tariff impact by sourcing from its low-cost Mexican operations, and this sourcing change will be completed by April 2019.

For the remaining half, management plans incremental price actions. Now, there is always the question of demand elasticity and the competitive response to price increase by American Woodmark. However, I am a bit optimistic this time around as Masco (MAS), the company’s primary competitor in home-centers, has also indicated that it will prefer to raise prices. Even in the worst case scenario, if the company is not able to hike prices and has to absorb half of the tariff hikes, it means ~$2.8 mn and ~$7 mn hit to the operating income in 10% and 25% tariff hike scenario, respectively. This equates to ~1.7% and ~4.3% impact on EPS, which, while a headwind, looks manageable. (Note: FY2019 already have ~7 months of impact from 10% tariff).

Also, although most of the investors have been focused on the short term cost impact of tariffs; these tariffs also make the US companies much more competitive against Chinese imports. Chinese cabinet sales make 20% to 25% of the total industry sales. If the tariffs were to rise to 25%, their price differential with respect to American companies will decrease, and the US companies may have an opportunity to gain market share at their expense.

Remodel Sales

Post RSI acquisition, American Woodmark derives ~62% of sales from remodel business which is usually much less cyclical than new construction sales. Remodel sales consist of dealer sales (~7% of the total company sales) and home centers (~55% of the total company sales).

American Woodmark entered dealer business in 2010. This business is still relatively small, and the company has been expanding its dealer network, gaining market share and growing at high-single digits to low-double digits rate for the past couple of years. Given it is still a small business and gaining market share, I believe it can continue to post positive growth even during a downturn. However, I am assuming flat sales for the purpose of scenario analysis.

On the home center front, sales depend on a variety of factors like promotional environment, consumer confidence, and existing home sales. However, over the last few years, the biggest story in the home-center business was increased promotional activity by Masco which negatively affected American Woodmark’s business. The good news is promotional levels are now at parity, and American Woodmark’s organic sales in home center channel have increased by low double digits in the first half of this fiscal year (9% in Q1, 12% in Q2). Talking about the promotional environment in home centers on Q1 2019 earnings call, the company's CEO Cary Dunston commented,

"Within home center we grew our core special order business by very healthy 10% for the quarter. We have been stating for well over 2 years that (if) our promotional levels were more at parity we would quickly restore our share. Our performance in the quarter certainly reflects this. "

The company's strong performance in home centers continued in Q2 2019 with double-digit growth in this channel. One of the reasons for improving promotional environment in home centers appears to be Masco's relatively high exposure to Chinese imports. Masco’s ~$600 mn of imports from China are subject to Sec. 301 tariffs, and the company has taken a decision to partially offset tariff impact by taking pricing increases. Talking about tariffs on its Q3 earnings call, Masco's CFO John G. Sznewajs said,

"We believe this amount of additional cost (from tariffs) is manageable through a combination of price increases, supplier negotiations, supply chain repositioning and other internal productivity measures. We have initiated actions and plans on each of these elements already here in 2018, but recognize there may be a lag between tariff implementation and mitigation in 2019."

So, I believe overall promotional environment will be much more disciplined in home center channel which will help American Woodmark.

Commentary from the home-centers has also been pretty upbeat of late. Home Depot held a sell-side lunch in early December where management discussed solid trends in home improvement segment of the housing market. You can find sell-side commentary on the event here, here and here. So, despite all the talk surrounding a slowdown, the ground level reality is there has been no change in consumer purchasing behavior so far.

Given Masco’s rollback on promotions and healthy industry trends, I believe the company’s remodel sales can continue to grow. However, for scenario analysis, I have assumed flat home center sales if housing doesn't enter a recession and ~5% decline if it were to enter a recession (similar to what the company saw in FY 2009).

State of Housing

American Woodmark is not the only building products company which has seen a sharp correction in stock price over the last one year. Almost every company related to housing end market has corrected meaningfully. Investors have begun pricing in an imminent housing recession. Given the last recession was caused by housing bust, investors are being extra careful this time.

Chart 3: Housing starts since 1959

Source: YCharts

However, unlike previous peaks, when there was a significant overbuild, the current housing starts remain well below their historical averages. Historically, median housing starts in the US have averaged at 1.5 million per annum. If we look at past cycles (see chart above), never ever has a housing cycle peaked below 1.5 mn new starts (in the last cycle, the number was 2.3mn). It makes sense, as in a cyclical industry, we need to have a period of overbuild – else, there will be no excesses to cause bust, and overbuild should happen above the median levels.

The main issue currently is not the lack of demand but affordability. Most of the Homebuilders are sharing similar sentiments on their earnings call. Below is some of the commentary from leading home builders from their recent earnings call (emphasis mine).

PulteGroup (PHM)

“Buyer traffic into our communities in Q3 was up 15% over last year, and the year-over-year gains accelerated as we moved through the quarter. To us, the increasing volume of consumer traffic indicates that homebuying interest remains high. While traffic into our communities was up in the quarter, company-wide absorption pace was down. These data points, along with the feedback from our sales teams, suggest that affordability may be becoming a bigger hurdle for potential buyers to overcome”

“We also believe that the industry continues to under build relative to demand. This is helping keep supply in check as evidenced by the fact that there's less than four months of inventory of new and existing homes on the market.”

D. R. Horton (DHI)

“…we continue to see good demand and a limited supply homes at affordable prices across all of our markets.”

“ … we do believe fundamentals from the economy, from demographics, from housing fundamentals especially at affordable price points, is still very solid.”

KB Home (KBH)

“I have seen all the coverage in the media and in the Investor world on where we're at in the cycle. And I keep getting back to the current inventory levels which are low.

And while the national numbers are four months, many of the markets we are in today, it's still two months, month and a half. And then when you get into the price points we play at it even less. So there's not a lot of inventory out there at the affordable price bands. “

Lennar (LEN)

“…we believe that the housing market in the United States remains strong and is primarily driven by the deficit in production that has persisted over a decade

Not many investors are listening to Homebuilders because their optimism was one of the reasons for the mess that happened in previous cycle. But if we look at the logical argument regarding under build versus overbuild, it makes sense. Also despite of all the noise regarding interest rates, they still remain at relatively low level compared to previous cycles.

Chart 4: US 30-year mortgage rates

Source: YCharts

Looking forward, I believe as Homebuilders continue to shift towards more entry level homes to meet demand, housing starts will stabilize and return to growth. There is a chance that 1.5 million housing starts will still be a mid-cycle level. However, for scenario analysis, I am assuming that we are currently at a mid-cycle level (1.25 mn starts) if there is no recession. In case of housing recession, I am assuming housing starts will decline to 850k, a level around which they have bottomed in previous cycles (except 2009, which was a different scenario because of subprime crisis).

FY 2019 Estimates

On its latest earnings call, management guided for 32-33% increase in revenues and 14.75% to 15.25% EBITDA margin. Management’s guidance included flattish new housing starts in the second half of FY19 (ending April). However, I am modeling a 3% decline based on flattish sequential trend and difficult yoy comparisons. This gives ~$10 mn less in revenues.

On the margin front, management has guided adjusted EBITDA between 14.75% and 15.25%. Since this guidance came before tariff hikes to 25% were postponed, I believe lower end was pricing in a tariff hike. I have started with 15% (mid-point) and then subtracted the impact of $10 mn lower revenues assuming ~25% decremental operating margins ($2.5 mn impact).

Depreciation and amortization, amortization of intangibles, and stock-based compensation for the full year are double 1HFY2019 levels. For adjusted EBIT, I have included stock based compensation but excluded amortization of intangibles. The company paid back ~$92 mn debt in the first half of this fiscal year. It expects to generate $150 mn in free cash flow this year and I have assumed $50mn debt repayment in the second half of this fiscal year. This gives ~$2mn less in interest costs in the second half.

Below, I have summarized calculation of FY2019 estimates assuming mid-point of management guidance as well as my estimates.

FY 2019 estimates assuming mid-point of Management Guidance

FY2019 Estimates using my assumptions

Sales

1657

1647

Adjusted EBITDA

248

246

D&A ex. amortization of intangibles

44

44

Amortization of intangibles

49

49

Stock based expense

3

3

Adjusted EBIT

201

198

Interest

35

35

PBT

166

163

Tax

42

41

Adjusted Net Income

124

122

Diluted Shares Outstanding

17.6

17.6

Adjusted EPS

7.04

6.93

Where Can Stock Go?

Over the last three years, American Woodmark has traded at a median P/E of 21.29x, while over the last five years, its median P/E has been 22.60. Most of the investors were treating the last few years of recovery as an early cycle phase, given the housing starts were much below their historical average of 1.5 mn. Currently, the sentiments have turned, and the stock is trading at 8x to 9x P/E because investors are expecting this cycle to peak at the current level of housing starts. So, I believe it is appropriate to take a P/E of 21x to 22x as bottom of the cycle or early cycle multiple, 8x to 9x as peak cycle multiple and 15x as a mid-cycle multiple.

Below is the scenario analysis and price target for American Woodmark based on these multiples.

Assumptions

EPS Calculations

Price Target

Housing Starts stabilize at current levels, and the company benefits from new product synergies

The current housing slowdown will not turn into a recession. We will get flattish starts over the next two years as builders adjust to demand for entry level housing and Fed eases with rate hikes. Then, the upcycle will continue, making the current stage in housing recovery a mid-cycle level. The company will get $28 mn EBIT benefit from new products over the next two years. Tariff will remain at the current levels, and the company will be able to offset half of its impact through shift in production to RSI's Mexico plant by April 2019.

Starting with FY2019e adjusted EBIT of $198 mn, adding $28 mn from new products and adding $0.47 mn benefit from shifting production to Mexico*, we get $227 mn in FY2021 EBIT. Subtracting $30 mn interest** and assuming 25.33% tax rate (similar to 1HFY19), we get adjusted net income of $147 mn or $8.38 in EPS (assuming constant share count).

Applying a mid-cycle P/E multiple of 15x, we get a two-year forward price target of $126. Discounting by 10%***, we get a 1 year forward target price of $114.

Housing recession with starts declining to 850k over the next three years and the company benefit from new product synergies

We will see a housing recession with new starts declining to 850k from current 1.25 mn over the next three years before bottoming out. The company will get $28 mn EBIT benefit from new products over the next two years and will show no outperformance thereafter. Tariff will rise to 25% with the company being able to offset half of its impact through re-sourcing from Mexico facility.

Starting with FY2019e sales of $1,647 mn and assuming 32% decline in new construction sales (in line with new housing starts), 5% per annum decline in home center business (similar to FY 2009) and flat dealer sales (still small gaining share), we get $329.4 mn lower sales or $82.35 mn of EBIT headwind (25% decremental margins). Subtracting this from FY2019e EBIT, adding $28mn from new products and subtracting $3.73 mn from tariffs*, we get bottom of the cycle EBIT of $140.26 mn. Subtracting $20 mn interest** and assuming 25.33% tax rate (similar to 1HFY19), we get adjusted net income of $90 mn or $5.13 in EPS (assuming constant share count)

Applying a bottom of the cycle P/E multiple of 21x, we get a price target of $108. Since we are assuming the housing recession will continue for the next three years before bottoming, we discount the price target by 10%*** for two years and get a 1-year forward target price of $89.

Bear case

Housing recession with no revenue synergies

We will see a housing recession with new starts declining to 850k from current 1.25 mn over the next three years before bottoming out. The company will get no benefit from new products. Tariff will rise to 25% with the company being able to offset half of its impact through re-sourcing to Mexico facility.

This case is similar to housing recession with synergies case above except we aren't adding $28mn benefit from new products. So, we have a bottom of the cycle EBIT of $112 mn, net income of $69 mn and an EPS of $3.93.

Applying a bottom of the cycle P/E multiple of 21x, we get a price target of $83. Discounting by 10%*** for two years, we get a 1 year forward target price of $68.

*Calculation for tariffs and benefit from shifting production to Mexico. Management's most recent (last quarter) adjusted EBITDA guidance of 15% (mid-point) for the current year includes seven months which are being impacted by ~10% tariff. Seven months of 10% tariff on $56 mn Chinese imports equates to $3.27 mn (= 56*10%*7/12) headwind in the current year. Next year, if tariffs remain at the current levels (10%), and the company is able to offset half of tariff impact by re-sourcing from Mexico, it will see $2.8 mn (= $56*10%*12/12*1/2) impact from tariffs. This is $0.47 mn ($3.27 mn-$2.80 mn) less than current year because of the benefit from Mexican re-sourcing. If tariffs were to rise to 25%, assuming the company is able to offset half of tariff impact by re-sourcing from Mexico, it will see $7 mn (= $56*25%*1/2) impact from tariffs. This translates into $3.73 mn ($7 mn-$3.27 mn) additional headwind next year.

**The company had net debt of $656 mn as of the last quarter end, and its pro forma net leverage was just under 2.65. Over the last six months, the company has paid back $92 mn in long-term debt. The company expects to generate more than $150mn in free cash flow this year which is higher than its expected net income of $122 mn. I believe FCF will be higher than net income by $20-30 mn over the next few years as there are not any major capex plans. I have assumed the company will pay back ~$50 mn more in long term debt in H2FY19 and ~$100 mn every year after that. The company can easily do that in no recession and recession with synergies case (FCF should bottom at $110 mn (net income + $20 mn) in recession with synergies case). In bear case without synergies, FCF should bottom around $89 mn (net income + $20 mn). If we average FCF reducing from $150 mn in the current fiscal to $89mn three years later, the average will still be >$100mn per year - so no problem in paying back ~$100 mn per annum in that case either. I have assumed that a $100 mn reduction in net debt leads to $5 mn in interest savings in my calculations.

***I have used long-term average annual return of S&P 500 for discounting. However, even if we were to use slightly higher rate, the stock will still offer a nice upside. For e.g., if we use 13% discount rate, we will get a price target of $111, $85 and $65 in no housing recession, housing recession with synergy and housing recession with no synergy scenario, respectively.

In addition to these scenarios, we can also argue for a bull case where 1.5 million housing starts is still a mid-cycle level in line with historical averages. Most of the investors were pricing in this scenario in early 2018 when the stock reached its all-time high of $148. If Federal Reserve stops after one hike in 2019 and then starts reducing interest rates from 2020 onwards, there is a possibility of bull case scenario playing out.

As of now, the stock price is even lower than our bear case scenario with no benefit from new products. With the company signing new contracts almost every week for Origins product and the current hiring going on for multifamily business, I believe it will see a meaningful outperformance going forward. Insiders understands this and the company’s CEO and CFO have started buying shares (link1, link2, link3) at these levels.

American Woodmark is a high quality company with a history of delivering above market growth rates. The company has very visible drivers in the form of market share gains from the opening price point products, entry in multifamily market and secular growth in dealer segment, which are likely to ensure its future outperformance. I believe the company is an excellent contrarian bet at the current levels.

Catalyst

  • Management will start providing more color on Origins product from Q4 onwards (results and conference call in May, 2019). As investors get a better understanding of new products and the outperformance starts showing in the results, the stock can re-rate meaningfully.
  • If housing starts stabilize at current levels and don’t take another leg down, comparisons will ease in the back half of 2019. Investors will react very positively to any signs of stabilization.

Downside Risk

  • Investors may continue to give low multiple for the next 4-5 months till the company starts showing meaningful outperformance help by new product launches.
  • Management's guidance includes flattish housing starts for the second half of FY19, while I believe we can see low single-digit decline. So, there is a risk that management may lower its guidance in February (Q3). It might create a knee jerk reaction on earnings day from short-term investors focused on quarterly earnings. But I believe most of the investors are already pricing in a housing recession. So, there won't be much downside. The stock will recover/gain once management starts giving color on new products.
  • Other risks include tariffs, higher interest rates and housing recession which are well understood and already priced in by the market.

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.