American Woodmark Update: Moving To Sidelines

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

American Woodmark posted good quarterly numbers and the stock has significantly outperformed the markets since the beginning of this year.

One of the company’s home-center partner has made some changes in their in-store support resources that are anticipated to negatively impact kitchen cabinet sales in the near term.

Masco, the company’s direct competitor in home center channel, also gave weak guidance for kitchen cabinet business.

I am on sidelines till more clarity emerges on the home-center business which is ~55% of American Woodmark’s sales.

American Woodmark (AMWD) is up ~50% since the beginning of this year. I last wrote about the stock in early January and after the recent run up I am moving to the sideline as risk versus rewards are balanced at the current levels. The company recently posted good quarterly numbers with EPS beating street estimates by 7 cents. The company’s new construction business has started meaningfully outperforming end market with core growth in this channel at 5% versus end-market down 3.7% (Single family starts during September, October and November of the prior period averaged 889,000 units, starts over that same time period from the current year, averaged 856,000 units, i.e., down 3.7%.). According to management, the company’s core dealer business is also over indexing the market with a growth of ~4% from prior year. Home-center business (~62% of the sales) remained a pain point with the company’s core made-to-order remodel business declining 4% in this channel.

There are two things impacting home-center channel:

  • Kitchen remodel is relatively a high ticket spending item and it appears that stock market volatility and uncertainty around the housing market conditions did impact some of the demand in the last quarter.
  • According to management, one of the company’s home center partner has made some changes in their in-store support resources that are anticipated to negatively impact kitchen cabinet sales in the short term.

I am not worried about the first point as I believe recent reversal in Federal reserves’ tone and broader stock market rally is expected to help consumer confidence going forward. However, I am worried about the changes at the company’s home-center partner.

Masco (MAS) recently gave FY2019 guidance and is expecting 0%-3% increase in kitchen cabinet sales. Most of Masco’s sales come from home center and it is one of the direct competitors of American Woodmark in this channel. Last year, Masco launched a new line of cabinets – Menards – which is expected to help FY2019 sales by ~$80 mn. Without Menards’ Masco cabinet sales in home center would have been down 5% to 8%. Masco is likely getting impacted from the same strategic shift at one of its home-center partners as American Woodmark. So, going by Masco's commentary, I assume that American Woodmark can see a mid- to high-single-digit decline in home-center business in the near term.

From a new construction perspective, since there is 60 days to 90 days lag between new construction starts and kitchen cabinet sales, I expect the company will see a slower end market in the current quarter (Housing starts in November and December were disappointing). While I expect the company to continue outperforming new construction end market, I will like to wait for a couple of months/quarters till market starts showing signs of reversal in new home construction business.

I still like American Woodmark’s long term story; but I am moving on the sidelines till more clarity emerges on the remodel business and the company provides FY2020 guidance on its next quarter earnings call.

Disclosure: I am/we are long MAS. 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: I am long Masco. Please note that the author is not a registered investment advisor and this article is not an investment advice. It should be assumed that the author intends to benefit from upwards movement in Masco’s stock price. It should also be assumed that author can buy more or sell his position in Masco at, above or below the target price (mentioned in the article) anytime without providing any update. Please perform your own due diligence before investing.