Foolish Forecast: American Woodmark

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For most companies, 2006 is just beginning. For cabinet maker American Woodmark (Nasdaq: AMWD), however, it's already 75% complete. Tomorrow the company is due to release its fiscal Q3 2006 earnings.

Wall Street Wisdom:

• General consensus. Only five analysts follow American Woodmark. Of these, two rate the stock a hold, two more a sell, and only one a buy.
• Revenues. Wall Street predicts a good sales quarter for American Woodmark, with revenue rising 11% to $203.9 million. Bear in mind, however, that the company itself predicted a much smaller (0% to 4%) increase three months ago.
• Earnings. Earnings are expected to head the other way. Estimates call for a 40% year-over-year decline to $0.25 per share.

Margin watch:
How do rising sales translate into falling profits? The chart below reveals all. Beginning in October 2004, the company's rolling margins began a long slide to where they are today. Higher raw materials and energy costs have hurt gross margins, and the damage continues to cascade down toward the bottom line.

Margins %	7/04	10/04	1/05	4/05	7/05	10/05
Gross	20.4	20.6	20.2	19.6	18.7	17.2
Op.	8.0	8.3	8.0	7.5	6.8	5.6
Net	4.8	5.1	4.9	4.6	4.1	3.4

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
By the time you reach the bottom line, you find that American Woodmark's net profitability has slid 170 basis points. That may not sound like a lot, but moving from 5.1% profitability to 3.4% is actually a 30% decline in the profit margin.

Foolish lookout:
The above numbers aren't just clear to you and me. CEO Jake Gosa promised last quarter that he would "focus the Company on margin improvement" in Q3. He also made the ominous prediction that American Woodmark would be negotiating with its customers to either "improve margins or transition their business to other suppliers" (read: "Pay up or find yourself another patsy"). So if sales numbers come in weaker than expected tomorrow, that might actually be good news. Just make sure that the sales the company keeps are the high margin ones.

Competitors:
Kimball International (Nasdaq: KBALB) and Masco (NYSE: MAS) number among American Woodmark's rivals.

Fool contributor Rich Smith does not own shares of any company named above.