Looking back over the recent history of Motley Fool columns on cabinet maker AmericanWoodmark (NASDAQ:AMWD), you see a startling degree of volatility. Unfortunately, Tuesday's announcement was negative, and sales and earnings shortfalls sent the stock down sharply in early trading.
The culprits in this disappointing quarter are pretty basic. Sales growth was on the low end of management guidance (and below the average analyst estimate), margins suffered from higher freight costs and manufacturing inefficiencies, and profits dropped by almost half.
Making matters a bit worse, inventories climbed about 23% in the quarter -- nearly triple the growth in sales. This isn't exactly a new problem, though, and fellow Fool Rich Smith has pointed out the comparative rise in inventories as a warning signal in the past.
Unfortunately, it doesn't sound like things are going to get a whole lot better anytime soon. As management pointed out, some homebuilders have recently lowered their expectations for new building activity next year. Management also seems to believe that remodeling activity is slacking off as a result of flagging consumer confidence.
By way of rough corroboration, although sales at home retailers, such as Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) -- which comprise about two-thirds of the company's sales -- have been solid, rival Masco (NYSE:MAS) recently cut guidance and American Standard (NYSE:ASD) is apparently seeing some softness in its business, as well. That doesn't exactly give me a lot of warm and fuzzy feelings about the imminent future of the home and remodeling markets.
What all this means for American Woodmark shareholders is that investors may flee this space, fearing that the "E" in the P/E ratio is vulnerable. While management is doing the right thing by exiting lower-margin business (even at the expense of growth) and looking to trim the headcount to reduce manufacturing inefficiencies, the market doesn't always reward companies for doing the right thing in the short run.
More homey takes:
Home Depot is a Motley Fool Inside Value recommendation. Looking for companies that have retained their intrinsic value despite being driven into the bargain bin? Take afree trialof Inside Value and find out which companies lead analyst Philip Durell is recommending this month, get all of his past picks, and gain access to our Foolish community of value stock fans.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
