For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.
What American Woodmark does
American Woodmark is a manufacturer of kitchen cabinetry and vanities for the construction and home remodeling sectors. In its most recent fiscal year, the company has benefited from a rebound in the construction market, as has been evidenced most notably by the 33% rise in new home orders from Lennar (NYSE: LEN ) .
Also working to American Woodmark's advantage is the strength we're witnessing in the results of do-it-yourself retailers like Home Depot (NYSE: HD ) . Homeowners who are financially unable to move and are choosing instead to remodel their homes are adding an extra boost to everyone's bottom line up the distribution channel.
Whom it competes against
The tricky thing about making cabinets and vanities is that American Woodmark is going to compete against notable names like Masco (NYSE: MAS ) , as well as countless other mom-and-pop local manufacturers. Suffice it to say, it's not an easy sector in which to turn a profit.
Even though the past few years have been challenging for any company associated with the housing sector, let's get a better feel for how American Woodmark stacks up next to its much larger peer, Masco.
|5-Year Revenue CAGR||(11.6%)||(9.5%)|
Sources: Morningstar, Yahoo! Finance, and author's calculations. Yields are projected. CAGR = compound annual growth rate.
There's no way to put this mildly, so let me just say it: Ugly! These two companies share some similarities in that both have struggled to grow sales since 2006, yet both also pay out a respectable 2.1% yield. Masco offers a demonstrably cheaper forward multiple compared to American Woodmark, which has lost money in three straight years and will likely report another annual loss, barring a miracle in fiscal 2012 as well. American Woodmark, though, does offer value in terms of book, cash flow, and especially debt to equity. This leads me to believe that American Woodmark's balance sheet is safe, despite the prolonged housing industry downturn.
After reviewing American Woodmark's prospects, I have decided to surprise you all and anoint the company with my very first CAPScall of underperform in this series.
I know that probably comes as a shock, especially considering that I've been touting the strength in the home remodeling sector of late. But American Woodmark has had more than ample time to turn itself around, and I'm just not seeing it. In fact, both American Woodmark and Masco began seeing a dramatic slowdown in sales a full year before housing prices peaked, and sales have been scarce since.
This is especially hard to stomach when other home and remodeling companies are enjoying a revival. Lumber Liquidators (NYSE: LL ) , for instance, reported an 18% increase in sales in its latest quarter as gross margin improved 110 basis points. There are plenty of other successful rebounds in the home remodeling sector to accompany Lumber Liquidators -- but not for American Woodmark.
There's no logical reason to pay 191 times forward earnings for a company that has had its revenue practically halved since 2006. Until American Woodmark can prove that this turnaround is for real, I'm going to hold my underperform rating on the company.
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