Investors in cabinetmaker American Woodmark (NASDAQ:AMWD) might want to find a roomy cabinet to hide in when they see the stock price today. A bad fourth quarter and poor guidance sent these shares down as much as 19% in morning trading.
Sales in the fourth quarter were up 15%, but that was at the bottom of the guidance range that management had given. The real (bad) news was on the margin side, though, as high input prices and freight fees walloped profitability. This led net income to drop about 11% from last year's level.
To some extent, this is nothing new. These shares have been pretty erratic over the past couple of years as management has tried to stay on top of the business. Growth in new construction markets has been so strong that it's been difficult to manage, and the company has also had to deal with steadily rising input costs and some pressure from Home Depot (NYSE:HD) and Lowe's (NYSE:LOW), which collectively account for almost two-thirds of sales.
As you might suspect, the fortunes of a cabinetmaker like American Woodmark are tied to the health of the housing market -- both new construction and the sale of existing homes (which is correlated to the remodeling market). Unfortunately, costs are growing faster than the demand side of the business. While higher prices in transport and steel can be solved by quickly adding capacity, that's not always possible to do so quickly in the lumber market.
Even though management's guidance for the next quarter is pretty bleak, I'll be keeping an eye on this company and stock. In my mind, a few bad quarters do not wipe away the company's history of solid execution. As the No. 3 player behind Masco (NYSE:MAS) and Fortune Brands (NYSE:FO) in a very fragmented market (the top four players account for about 40% of sales), the company is still well-positioned.
That said, it's going to take a little time for this stock to settle down, and I don't believe that stepping in front of freight trains is a long-term strategy for success. What's more, any prospective investor must realize how volatile this business has been and the extent to which management cannot control end-user demand or input costs.
For more Foolishness on American Woodmark, see:
- American Woodmark Hammered
- American Woodmark Nails It
- American Woodmark Is Shellacked
- American Woodmark's Hard-Knock Q3
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
