Armstrong World Leveraged To Non-Residential Recovery And Pricing, But Self-Help Could Go Even Further

Writing about Armstrong World Industries (NYSE:AWI) in August, I was ambivalent on this leading manufacturer of commercial ceiling tiles and specialty ceiling materials, as I thought the company's strong leadership in its core market was offset by the share valuation and the prospect of weaker renovation activity in 2022 ahead of recovery in non-residential construction.

Since then, the shares have fallen more than 10%, and management's guidance for margins in 2022 was softer than the Street had expected. At the same time, though, the company is showing exceptional pricing power and the company is still leveraged to what I expect will be a meaningful renovation cycle targeting "healthy building" initiatives. If Armstrong can generate long-term revenue growth in the mid-single-digits, free cash flow growth in the high single-digits, and mid-20%'s adjusted operating margins, I see upside of around 20% from here.

 

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Armstrong World Leveraged To Non-Residential Recovery And Pricing, But Self-Help Could Go Even Further

Armstrong World Industries Worth Watching For An 'Air Pocket'

 

Ceilings are pretty fundamental to construction, given that employees don’t particularly enjoy the sun beating down on them or getting rained on, and Armstrong World Industries (AWI) has built itself into a leading player in the commercial ceiling market with its mineral fiber offerings, including a range of premium products that can meet project-specific demands for acoustic performance, humidity or fire resistance, sustainability, or even air purification capabilities.

Armstrong has jumped on post-pandemic recovery expectations and the results in the first half of 2021 have been stronger than expected, helped by strong renovation/repair demand. As that demand eases in the second half, there could be an “air pocket” of performance between less robust renovation demand and recovering new-build activity, and that would be an opportunity to watch over. While Armstrong isn’t “can’t miss” cheap today, management has simplified the business into an FCF engine that should keep running for some time to come.

 

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Armstrong World Industries Worth Watching For An 'Air Pocket'

Armstrong World Industries Could Use A Little More Head Room

Armstrong World Industries (NYSE:AWI) is good at what it does - it is the market leader in commercial ceilings in North America, at/near the top in Europe, and posts strong margins - but it isn't always enough to be good at what you do. Although Armstrong has seen a recovery in some key end-markets like office construction, trends in education and healthcare have been weaker and the renovation/remodel market hasn't really perked up.

Armstrong could be a beneficiary of a lower tax rate, and the company's long-term efforts to improve its share in specialty ceilings are sound, but near-term risks like higher input costs and slowing end-market activity shouldn't be ignored given an already-healthy valuation based on cash flow and EBITDA.

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Armstrong World Industries Could Use A Little More Head Room

Investopedia: Home Depot Continues To Ride A Stop-Start Recovery

Investors seem to be pretty committed to the idea that a real recovery is underway in America's housing market. While earnings reports from companies like Armstrong World Industries (NYSE:AWI), Mohawk (NYSE:MHK), Masco (NYSE:MAS) and Stanley Black & Decker (NYSE:SWK) did not support an unequivocal bull argument, the stocks recovered pretty quickly.

What's more, leading home improvement retailer Home Depot (NYSE:HD) continues to report rebounding sales in a wide range of housing-related product categories. Although Home Depot shares seem ahead of themselves on valuation alone, momentum will likely stay with the stock until the beat-and-raise pattern is broken.

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