Tic-tac-toe, investors want to know: Will cabinet maker American Woodmark (NASDAQ:AMWD) make it three in a row for earnings "beats" when it reports its fiscal first-quarter 2007 numbers tomorrow?

What analysts say:

  • Buy, sell, or waffle? American Woodmark's five analysts are feeling a bit more bullish today than three months ago. The stock now gets two buys and three hold ratings.
  • Revenues. Even so, pessimism reigns on the sales front. On average, analysts are looking for just 2% year-over-year growth to $219.6 million.
  • Earnings. Profits expectations are more optimistic. The consensus is that they'll be up 47% at $0.66 per share.

What management says:
It's been nearly a year since CEO James Gosa began steering his company away from low-margin sales in pursuit of greater profits, and the effort is already bearing fruit. Last quarter, for example, profits per diluted share nearly doubled year over year. Gosa attributed this success to "healthy seasonal sales" and an improved sales mix as American Woodmark continues to "transition" away from selling low-margin products.

In other recent developments, last month, American Woodmark reupped its circa 2001 share buyback authorization, initially at $50 million worth of shares and now, almost exhausted, by another $20 million. Earlier that month, the company announced that its "principal accounting officer," Dennis Nolan, has resigned to "pursue other business opportunities."

What management does:
The effects of the company's initiative to improve the profitability of its product mix are making themselves felt on the margin trends as well. As you can see below, three months into the shift toward seeking more profitable sales, rolling gross, operating, and net margins leapt northward last quarter.

Margins %

1/05

4/05

7/05

10/05

1/06

4/06

Gross

20.2

19.6

18.7

17.2

17

17.9

Op.

8.0

7.5

6.8

5.6

5.3

6.4

Net

4.9

4.6

4.1

3.4

3.3

4
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:
As in previous comments on American Woodmark, my main concern here is over inventories. As the firm focuses on boosting its margins, its sales growth has been noticeably (and expectedly) lackluster, averaging 4% year over year for the last six months for example. Inventories, meanwhile, climbed 9%.

That's not a huge discrepancy, but it seems to me that it does pose a problem for the company if inventories continue to grow. Ultimately, those inventories will have to get moved out of the warehouse and converted to cash, and my worry is that this will have to be done at lower margins -- running counter to the firm's stated aim of boosting its margins. That said, for now, the inventory overhang is not large, margins are rising healthily, and generally everything is looking on track at American Woodmark. Let's see if that holds true tomorrow.

Competitors:

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

Customers:

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

We've been watching American Woodmark's impressive turnaround for some months now. Follow along in:

Home Depot is a Motley Fool Inside Value recommendation. Take the newsletter for a 30-day free spin.

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