In life, one is told to value "actions, not words." Not so in the stock market.
It would be hard to fault the actions reported by cabinetmaker American Woodmark (NASDAQ:AMWD) yesterday. Expected to report $0.66 per share (already a huge improvement over last year's numbers), the company instead reported a whopping $0.82 per share, all but doubling the profit it earned in fiscal Q1 2006. As a result, the stock fell 11%.
Huh?
That's pretty much the reaction I had, too. But when evaluating a stock, Wall Street places less emphasis on how well a company actually performed than on how well it says it will perform in the future. (Intel (NASDAQ:INTC) investors will be familiar with this Wall Street disconnect.) And how well Woodmark will perform next quarter, according to the company itself, is considerably worse than what investors had been expecting. Before the earnings report, consensus estimates called for the company to earn $0.68 per share next quarter. In its quarterly earnings guidance, however, Woodmark advised that it expects to earn only $0.55 to $0.60 per share on a 1% to 5% decline in revenues.
That simply reinforces my own view that Wall Street's making a bad call here. While it's true that the midpoint of Woodmark's range, $0.57, is a far cry from what Wall Street is hoping to see, it's also true that hitting that mark would make for an 84% improvement in earnings over last year's number.
Fools, after reading yesterday's news, I'm more convinced than ever that Woodmark has embarked on a turnaround. In addition to the "relative" good news of the earnings beat, Woodmark notched objective improvements across the board. Gross margins spiked to 22%, a 490-basis-point improvement over last year, thanks to: (1) fewer low-margin products sold; (2) stronger-than-expected sales of higher-margin products; and (3) the "delayed impact of previously announced raw-materials cost increases." (By the way, beware of that third one. "Delayed" sounds ominous to this Fool. I'd rather have heard "averted.")
But speaking of things "averted," the bad news I was actually expecting to hear yesterday never surfaced. As described in Tuesday's Foolish Forecast, I was worried that Woodmark would again report that its inventories climbed last quarter. To the contrary, and to Woodmark's credit, they didn't. Inventories declined 7%, and the company improved its debt collection dramatically, dropping accounts receivable by 25% year over year.
If these are the kinds of actions that Wall Street frowns upon, then this Fool has just one thing to say: Keep on "disappointing" the Street, Woodmark. If they don't want your shares, I'll take them.
American Woodmark isn't a very well-followed stock (which may also help explain Wall Street's bad call.) For a higher-profile example of the Street's preference for words over actions, read: Intel Missed? Big Whoop.
Intel is a Motley Fool Inside Value recommendation. When the market irrationally panics, are you waiting to buy? Find more great undervalued stocks with a free 30-day trial.
Fool contributor Rich Smith owns shares of Intel, and is seriously considering picking up some American Woodmark -- after the 10-day waiting period required by the Fool's rules, of course.
