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Armstrong World (AWI) Jumps 43% YTD: What's Behind the Rally?

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Armstrong World Industries, Inc. (AWI - Free Report) has been gaining strength from the architectural specialty business, buyout synergies, strong backlog and prudent investments. Shares of this global producer of ceiling systems have gained 43% so far this year, outperforming the Zacks Building Products – Miscellaneous industry’s 17.4% rally.

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Earnings estimates for the second quarter, third quarter and full-year 2021 have moved up 9.9%, 6.4%, and 0.8%, respectively, over the past 60 days. This trend signifies bullish analyst sentiments, indicating robust fundamentals and the expectation of outperformance in the near term. This Zacks Rank #3 (Hold) company also has a solid earnings surprise history. Armstrong World’s earnings surpassed the Zacks Consensus Estimate in four of the trailing seven quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, COVID-induced volume reductions in the organic business and an increase in SG&A expenses are concerns.

Major Growth Drivers

Architectural Specialty Business: First-quarter 2021 was highlighted by record order intake for Architectural Specialties products. This business delivered solid top-line growth of 25% year over year driven backed by 2020 acquisitions of Turf, Moz and Arktura. A significant quarterly highlight was the acceleration in order intake, given sequential organic order intake at a record level that resulted in stronger-than-expected backlog. In the first quarter, the company continued investment in architectural specialties to further extend capabilities to support strong growth in this segment.

Inorganic Drive: Armstrong World follows a systematic inorganic strategy to enhance its portfolio. In 2020, the company made acquisitions of Arktura (a designer and fabricator of ceilings, walls, partitions and facades), Moz Designs (a Northern California-based designer and fabricator of custom architectural metal ceilings, walls, dividers, and column covers for interior as well as exterior applications) and Turf Design (a Chicago-based commercial interiors design house and maker of custom felt ceiling as well as wall solutions). All these buyouts have been included as a component of the Architectural Specialties segment, thereby enhancing its product portfolio.

Solid Prospects: Given strong backlog, the company remains confident in delivering 2021 sales growth of more than 30%. It has solid prospects, as is evident from the expected earnings growth rate for 2021, which is pegged at 33.3%. The Zacks Consensus Estimate for 2021 revenues indicates an increase of 28.3% from a year ago.

Higher ROE: Armstrong World’s return on equity (ROE) is indicative of growth potential. The company’s ROE of 37.2% compares favorably with the industry average of 10.7%, implying that it is efficient in using shareholders’ funds.


COVID-Induced Lower Volumes: Armstrong World’s first-quarter 2021 adjusted earnings declined 23.4% and adjusted sales grew just 2% from a year ago. Contributions from acquisitions made in 2020 were partly offset by COVID-induced volume reductions in the organic business. Adjusted EBITDA for the said quarter fell 12% from the comparable year-ago period owing to COVID-related volume declines, continuing investments in growth initiatives and resumption of spending that was deferred when the pandemic hit.

Raw Material Inflation: Higher raw material costs remain a concern for Armstrong World and companies like Masco (MAS - Free Report) , TopBuild (BLD - Free Report) and Owens Corning Inc. (OC - Free Report) . The company has been experiencing rising input and freight costs in Mineral Fiber and Architectural Specialties segments. Although the company has been working to recover higher costs through price increases, the ongoing volatility in material costs and tightened capacity remain concerns.

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