American Woodmark Is Shellacked

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Cabinetmaker American Woodmark (Nasdaq: AMWD) closed out its fourth quarter much as it closed out its third quarter. Sales grew briskly (actually, the quarter's 25% increase in sales handily beat the company's own projected 15% to 20% growth). Earnings grew too, but at nowhere near the same clip, hitting just the lowest number in the company's projected $1.00 to $1.05 earnings estimate, up from $0.91 a year ago.

When a company racks up 25% sales growth but only 10% earnings growth, you know something has to be wrong. And in American Woodmark's case, the problem is as obvious as a popped nail.

Reading this quarter's earnings release, one could be forgiven for thinking he was reading last quarter's -- or the quarter's before that. In each, American Woodmark laments the high cost of raw materials, of labor and of pensions and medical benefits for its workforce, blaming various combinations for hurting its gross margins (which declined, yet again, to 19.6% this quarter). In fact, to find a quarter in which the company boasts of increased gross margins, you have to go back through nearly two years' worth of press releases.

Moreover, the company seems incapable of expanding its gross margins by passing on the higher materials costs to its customers -- meaning primarily resellers Home Depot (NYSE: HD) and Lowe's (NYSE: LOW). This suggests that American Woodmark is not only getting gouged by its suppliers on one side, but also being squeezed by its customers on the other. Not an enviable position to be in.

It could be awhile before American Woodmark demonstrates an ability to halt the slide in its gross margins (operating and profit margins have also been contracting, but that is due almost entirely to the gross margin declines). Till then, Foolish investors should shun this company despite its otherwise reasonable valuation.

Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.