Someone remind me: What year is it? 2005? Because the news out on American Woodmark (NASDAQ:AMWD) today sounds an awful lot like the news I wrote nearly one year ago to the day.
It's not exactly the same news, of course. On Aug. 25, 2004, American Woodmark reported both a 21% increase in sales and a 29% increase in profits per diluted share for its first quarter, in comparison with (you guessed it) its numbers released in August 2003. This time around, the Virginia cabinet maker reported "only" a 15% increase in sales, and an even less impressive 22% decline in earnings per share.
Where the two years' news really dovetail, however, is in Wall Street's reaction to the news -- both then and now. Last year, American Woodmark's superb sales and profits growth earned the company a 9% increase in market cap. This year, perversely, the sales increase/profits decline earned the company a 14% boost in market cap.
Chalk it up to the power of diminished expectations. Wall Street's expectations for American Woodmark's profits were almost to the vanishing point, what with the construction boom looking like it's never going to end and the consequent rise in demand for and price of raw materials -- and let's not forget the sky-high price of oil, raising the cost of doing business while sapping consumers' ability to pay for American Woodmark's goods. So when the company came out and announced that it beat consensus analyst estimates of $0.35 per share (by a full $0.10, no less), its stock just surged.
For current shareholders, that's great news. Congrats, and I'll leave it at that.
For the rest of us, though, I'd suggest continued caution on this company, because American Woodmark's not out of the woods yet. Recall that in its latest 10-K filing, the company showed a 23% increase in inventories (that's bad), but a greater than 70% increase in inventories of finished goods. That's much, much worse, for it shows that throughout last year, demand for the company's products simply collapsed. Bear that in mind if you are tempted to look at the company's latest year-on-year inventory increase of 25% and think to yourself: "Not a problem. It's not that much more than the sales increase."
Because it is (that much more). And because it might very well be a problem, if most of that increase was again in the finished goods category.
For past Foolish coverage of American Woodmark, read:
- Scratches on American Woodmark
- American Woodmark Hammered
- American Woodmark Nails It
- American Woodmark Is Shellacked
Fool contributor Rich Smith has no position in American Woodmark.
