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Armstrong World Rides on Acquisitions, Material Costs High

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Armstrong World Industries, Inc. (AWI - Free Report) is riding high on systematic inorganic strategy, robust price realization, volume growth and investment in new products. Solid segmental performance across the board and favorable average unit values ("AUV") are adding to the positives.

Notably, its shares have broadly outperformed the industry so far this year. The stock has gained 59.7% compared with the industry’s 23.9% rally in the said period. Earnings estimates for the current and next year have been trending upward over the past 60 days, reflecting analysts’ optimism surrounding the stock.

However, raw-material cost inflation and lower volumes in the Mineral Fiber segment due to inclement weather are pressurizing the company’s bottom-line growth.

Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

Catalysts Driving Growth

Acquisitions have been a key growth driver of Armstrong World’s solid year-over-year performance. On Mar 4, 2019, it acquired Architectural Components Group, Inc. (“ACGI”), a leading custom wood ceilings and walls solution provider. This acquisition will give a boost to the existing wood ceiling and wall solutions business. Notably, the said buyout is the largest to date and is expected to add $20-$25 million to total sales in 2019.

In 2018, it purchased OH-based manufacturer of aluminum and stainless metal ceilings, Steel Ceilings (“SCI”), and a 31-year manufacturer, Plasterform. Notably, in first-quarter 2019, the Architectural Specialties segment revenues increased 24% year over year, backed by robust acquisitions and higher volumes from increased market penetration and new construction activity.

Armstrong World’s robust price realization and volume improvement are likely to strengthen growth prospects over the long haul. The company has been implementing higher prices in order to offset increased input costs and extra freight activity.

Remarkably, in the first quarter, its gross margins improved an impressive 660 basis points (bps) and adjusted EBITDA margin expanded 330 bps year over year, courtesy of higher volume, price, and mix.

Armstrong World has been strategically investing in new products, sales and support services, as well as advanced manufacturing capabilities. In this regard, it launched Sustain, Total Acoustics and DESIGNFlex in 2017. These products have experienced astonishing adoption rates by architects, which are likely to pay off in 2019 and beyond.

For full-year 2019, the company expects high-single digit sales growth fueled by volume gains in Mineral Fiber, new products and sales initiatives, continued AUV expansion, organic growth of 15% in Architectural Specialties, along with acquisitions. Adjusted EBITDA improvement is anticipated to be more than 10% during the year.

Causes of Concern

Armstrong World has been experiencing higher raw material and freight costs over the last few quarters. Increased steel and aluminum tariffs continue to impact its overall results. Although the company has been working to recover higher commodity cost through price increases, we expect the ongoing volatility in material costs to continue in the near term.

Meanwhile, soft volumes in the Mineral Fiber segment due to weakness in Latin America, its Big Box channel, and weather-related challenges in the upper Midwest as well as parts of Canada are adding to the woes. Although the segment’s net sales grew 3.1% year over year in the first quarter due to increased AUV, it experienced reduced volumes primarily in lower-end ceiling tile products.

Stocks to Consider

Some better-ranked stocks in the same space are Arcosa, Inc. (ACA - Free Report) , Construction Partners, Inc. (ROAD - Free Report) and TopBuild Corp. (BLD - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can also see the complete list of today’s Zacks #1 Rank stocks here.

Arcosa’s earnings for the current year are expected to increase 14.3%.

Construction Partners surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with average positive earnings surprise of 11.9%.

TopBuild is expected to record an earnings growth rate of 21.7% in 2019.

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