Armstrong World Poised to Gain From Rising AUV, Tax Reform

On Mar 5, we issued an updated research report on Armstrong World Industries, Inc.AWI . The company is poised to gain from average unit value (AUV) improvement and tax reform. The company's focus on restructuring activities, investment in new products, as well as the Tectum acquisition are also anticipated to drive growth.

Let's illustrate these growth factors in detail.

Rising AUV to Boost Top Line

Armstrong World posted strong sales in fourth-quarter 2017, marking 9% year-over-year growth. Both volume and AUV increase contributed to this top-line growth in the quarter. Notably, Armstrong World concluded $100-million investment in 2017 to develop industry-leading Mineral Fiber manufacturing capabilities which support volume and AUV growth.

Considering these factors, the company guided its net sales growth range of 5-7% for 2018 aided by AUV improvement in Mineral Fiber segment and continued double-digit sales growth in the Architectural Specialties segment.

U.S. Tax Reform to Aid Earnings

Tax reform in the United States will reduce Armstrong World's tax rate from 35% to 25% which will provide a significant boost to EPS and cash flow. With the tax rate at a constant 25% rate, the company expects EPS to be up in the range of 17-24%.

Armstrong World to Gain From Product Launches

The company has been strategically investing in new products, sales and support services, and advanced manufacturing capabilities. In the spring of 2017, it took a major step to fortify the Mineral Fiber category with the launch of Sustain.

Further, the introduction of Total Acoustics in 2016 has strengthened the company's leadership position at the high-end of the Mineral Fiber segment. These launches have experienced extraordinary rates of adoption by architects, and the company expects the penetration of these products to continue through 2018 and beyond.

Focus on Restructuring to Boost Performance

In 2017, Armstrong World took steps to optimize its manufacturing footprint and overall cost structure. In November, the company announced its intention to close the St. Helens plant and open a distribution center near Phoenix in order to provide better service to its West Coast customers.

It has also planned to restructure the G&A profile to serve an Americas-focused business. These actions will yield cost savings in the range of $15-$20 million by the end of 2019. These will also stoke EBITDA growth in the second half of 2018 and the company expects to deliver $400 million of adjusted EBITDA in 2019.

Tectum Acquisition to Propel Growth

In January 2017, Armstrong World closed the buyout of Tectum, which accelerated its penetration into specialty ceilings and walls. Throughout the year, its team integrated Tectum into the Armstrong platform, and the results have exceeded expectations.

Now having fully integrated the business, the company can begin making modest capital investments to further enhance capabilities and profitability in this product line. Moreover, continued sales leverage and capital investments at Tectum will enable its Architectural Specialty business to expand margins in 2018 and beyond.

Share Price Performance

Armstrong World has outperformed its industry with respect to price performance over the past six months. The stock has appreciated around 23%, while the industry has recorded growth of 11% during the same time frame.

Zacks Rank & Other Stocks to Consider

Armstrong World carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the same sector are Patrick Industries, Inc. PATK , Owens Corning OC and Simpson Manufacturing Co., Inc. SSD . While Patrick Industries sports a Zacks Rank #1 (Strong Buy), Owens Corning and Simpson Manufacturing carry a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

Patrick Industries has a long-term earnings growth rate of 11.1%. Its shares have rallied 28.9%, over the past six months.

Owens Corning has a long-term earnings growth rate of 17.8%. The company's shares have been up 6% during the same time frame.

Simpson Manufacturing has a long-term earnings growth rate of 5%. The stock has gained 23.4% in six months' time.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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