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Why Shares of Armstrong World Industries Are Down Today

By Lou Whiteman – Jul 28, 2020 at 3:25PM

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COVID-19-related construction weakness weighed on second-quarter results.

What happened

Shares of Armstrong World Industries (AWI -0.07%) traded down 11% on Wednesday afternoon after the construction materials supplier reported worse-than-expected quarterly results. The COVID-19 pandemic has caused delays in construction projects, leading to sluggish demand for the products Armstrong manufactures.

So what

On Tuesday morning Armstrong reported adjusted second-quarter earnings of $0.75 per share on revenue of $203.2 million, falling short of analyst expectations for $0.92 per share in earnings on revenue of $223 million. Total sales fell 25% year over year and operating income was down 28%, due largely to weakness in major metropolitan areas that were impacted by COVID-19.

Drywall installation at a construction site.

Image source: Getty Images.

"The second quarter of 2020 was unprecedented in many ways, and created numerous challenges for our teams and partners," Armstrong CEO Vic Grizzle said in a statement.

The company was able to post $63 million in adjusted free cash flow, up 14% from the second quarter of 2019. And Armstrong said it believes it can generate a free cash flow margin of 22% to 25% of sales for the entire year, giving the company some amount of liquidity and wiggle room to adjust to changing market conditions due to the pandemic.

Now what

Grizzle is hoping that in the months to come the pandemic will create opportunities for Armstrong as building owners are required to make alterations to keep their buildings safe. "We are seeing sequential improvement in the quarter and are focused on a future that will demand safer interior environments in schools, offices, healthcare facilities and other spaces," the CEO said.

Armstrong is not letting the poor quarter alter corporate strategy. The company announced it was acquiring Turf Design, a maker of custom ceiling and wall products that produces approximately $25 million in annual sales, and the board has authorized an increase in Armstrong's share repurchase program to $1.2 billion from $700 million.

But there are still dangers in the quarters to come. Even assuming no major second wave to the pandemic, Armstrong believes full-year revenue to be down 10% to 18% year over year. Given the uncertainty, investors are moving to the sidelines on Wednesday instead of riding out a potentially sluggish construction environment.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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