The first-quarter 2006 earnings rush is over for most U.S. companies. Now we're in the lull before the Q2 results start coming out -- again, for most U.S. companies. But for cabinetmaker American Woodmark (NASDAQ:AMWD), it's already time to wrap up fiscal 2006. Tomorrow, the company reports its fiscal Q4 and full-year 2006 numbers.

What analysts say:

  • Buy, sell, or waffle? Only five analysts follow American Woodmark, which gets one buy, one sell, and three hold ratings.
  • Revenues. Quarterly sales are believed to have fallen 1% in comparison to last year, down to $205 million.
  • Earnings. But analysts are expecting a 16% rise in profits ($0.51 per share is the target).

What management says:
Two quarters back, CEO Jake Gosa set his company on a path that would sacrifice low-margin sales when necessary in the hopes of bolstering the firm's overall profitability. The effort bore fruit in Q3, when American Woodmark missed analyst sales estimates by a wide margin -- but hit the very top of its own sales estimates and exceeded everyone's hopes for profitability. A clearer case of a company "transition[ing] out of certain low margin products," eschewing unprofitable sales while keeping the profitable ones, would be hard to imagine.

What management does:
But exceeding expectations isn't always the same thing as doing well. And in American Woodmark's case, accomplishing the former still resulted in a 12% slip in profits. Examining the firm's rolling margins, we see that the long-term slide continues, with average gross, operating, and net margins today sitting far below where they were 18 months, or even one year, ago.

Margins %

10/04

1/05

4/05

7/05

10/05

1/06

Gross

20.6

20.2

19.6

18.7

17.2

17

Op.

8.3

8

7.5

6.8

5.6

5.3

Net

5.1

4.9

4.6

4.1

3.4

3.3

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
In early March, having run through its previous authorization to repurchase $40 million worth of its stock, American Woodmark upped its buyback limit by another $10 million. Although the stock began rising shortly after this announcement was made, it slid back toward the pre-announcement price in late May, which may well have enticed American Woodmark to marry actions to words. Look for a decreased share count tomorrow.

Another thing to look for in tomorrow's news will be what's going on with inventories. Last quarter, we saw those rise 13% year over year, despite the company growing sales only 4%. At the time, I cautioned Fool readers that rising inventories often need to be discounted in order to move them out of the warehouse -- meaning that the most interesting story American Woodmark may have to tell tomorrow is how it managed to both increase profit margins and restrain inventory growth. Considering the analysts' prediction of falling sales, my bet is that even if we learn that profit margins did rise, inventories did, too -- which will just increase the likelihood of margin erosion down the road. Let's hope the company proves me overly pessimistic.

Competitors:

  • Fortune Brands (NYSE:FO)
  • Kimball (NASDAQ:KBALB)
  • Masco (NYSE:MAS)

Customers:

  • Home Depot (NYSE:HD)
  • Lowe's (NYSE:LOW)

Home Depot is a Motley Fool Inside Value pick. Take the newsletter dedicated to top-shelf stocks at bargain-basement prices for a 30-day free spin.

Fool contributor Rich Smith does not own shares of any company named above.