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Why Is Armstrong World Industries (AWI) Up 8.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Armstrong World Industries (AWI - Free Report) . Shares have added about 8.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Armstrong World Industries due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Armstrong World Q3 Earnings Lag, Sales Beat Estimates

Armstrong World Industries, Inc. reported third-quarter 2018 results, wherein adjusted earnings of $1.11 per share missed the Zacks Consensus Estimate of $1.18 per share by 5.9%. However, the reported figure increased 23.4% from 90 cents per share in the prior-year quarter.

Net sales of $260.5 million surpassed the consensus mark of $250 million by 4.2%. Also, net sales increased 11.4% year over year, driven by greater average unit values ("AUV") in the Mineral Fiber segment from positive pricing and mix, as well as strong volume in the Architectural Specialties segment.

Notably, the company increased its full-year 2018 guidance for revenues and adjusted free cash flow, backed by strong organic growth in Architectural Specialties and higher AUV in Mineral Fiber.

Operational Update

Cost of sales grew 13.6% to $162.6 million from $143.1 million in the prior-year quarter. Gross profit increased 7.8% to $97.9 million in the reported quarter from $90.8 million in the year-ago quarter.

Selling, general and administrative (SG&A) expenses increased 14.6% year over year to $35.3 million. The SG&A expenses were up mainly due to reconciliation of cost allocated to WAVE and higher incentive plan accrued in 2018.

Operating income grew 10% year over year to $81.3 million. Adjusted EBITDA improved 10.4% year over year to $100 million. Both the improvements were mainly backed by significant volume growth in the Architectural Specialties business, along with strong AUV and higher equity earnings from WAVE. However, higher SG&A expenses, along with increased input and manufacturing costs partially offset the positives.

Segment Performance

Mineral Fiber (81.7% of total sales): Net sales in the segment were up 6.9% year over year to $212.8 million, backed by higher AUV, which was partially offset by lower volume.

Operating income dipped 1.8% to $71.8 million in the quarter due to higher depreciation related to the closed St. Helens plant, higher SG&A expenses, and greater manufacturing and input costs. Nevertheless, adjusted EBITDA grew 6.9% from the prior-year quarter to $88 million.

Architectural Specialties (18.3%): The segment’s sales increased 36.7% year over year to $47.7 million, owing to increased market penetration and new construction activity that contributed to strong volume growth. Notably, the segment’s operating profit rose 46.8% year over year to $11.3 million. Also, adjusted EBITDA came in at $12 million, up 48.6% from the prior-year level.

Financials

Armstrong World reported cash and cash equivalents of $337 million at the end of the quarter compared with $116.5 million at the end of the prior-year quarter.

Net cash flow provided by operations was $159 million in the reported quarter compared with $104.9 million recorded in the year-earlier quarter.

Guidance

For 2018, Armstrong World increased its net sales growth guidance to 8-9% from the prior guided range of 5-7%. While the company reaffirmed its view for adjusted EBITDA growth of more than 10%, it increased the midpoint of adjusted EPS range by 1 cent to $3.72.

However, adjusted free cash flow is now expected to grow 43-50%, up from prior expectation of 20-30%.

The company repurchased four million shares for $256 million in the first nine months of 2018. Since the inception of the repurchase program in 2016, Armstrong World repurchased 6.9 million shares for $300 million at an average share price of $55 per share.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 9.72% due to these changes.

VGM Scores

At this time, Armstrong World Industries has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Armstrong World Industries has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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