How difficult has the last few years been for cabinet makers? The last time American Woodmark (Nasdaq:AMWD) made an annual profit was fiscal 2008 when it generated a net profit of just $4.3 million on revenues of $602.4 million. Its best year ever in terms of profits came in fiscal 2005 when it made $35.6 million on $777 million in revenue. Back then it will was riding high with a market cap more than double where it sits today. The road to recovery has been a long and winding one for the Virginia company and it's not out of the woods by any means. However, there's enough light at the end of the tunnel to give this micro cap a shot. I'll explain why.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.


American Woodmark got its start in 1980 when four managers of Boise Cascade's cabinet division acquired the company in a leveraged buyout. By 1986, American Woodmark was a public company, selling 1.25 million shares at $15 each. That year it made $5.5 million on $97 million in sales for a net margin of 5.7%. Its best year was in 2005 when its net margin was slightly lower at 4.6%, but on much higher volumes. What it would do for 4.6% net margins today. While still in the red, the business is at least pointed in the right direction.

Third Quarter Results

On the revenue front, overall sales grew by 8% to $119.98 million. Its most impressive feat during the quarter was the 30% increase in new construction business. In the first nine months of the year, both its new construction and remodeling businesses gained market share from its competitors, resulting in increases of more than 20 and 10% respectively. Its largest remodeling customers - Lowe's (NYSE:LOW) and Home Depot (NYSE:HD) represented 73% of its sales in 2011 - are continuing to provide sales promotions to consumers including free products and cash discounts. While it's gained market share through these promotions, it's begun to relax those activities, which should result in improved gross margins in future quarters.

On the loss front, they are significant due to restructuring plans. However, when you exclude those restructuring costs, its net loss in the third quarter was $2.8 million, 52% less than in fiscal 2011. Its net loss for the first nine months of fiscal 2012 was $8.5 million, 49% less year-over-year. Additional good news includes a gross profit margin improvement in the third quarter of 130 basis points to 12.2% and a 180 basis point improvement for the first three quarters of fiscal 2012. With the top line improving, it's vital that management continues working on reducing its operating costs.

To that end, it announced in December 2011 that it was permanently closing two manufacturing plants and selling a third while also freezing its pension plans effective Apr. 30, 2012. You never like to see pensions affected but when the company has lost money for four consecutive years; everybody must bite the bullet. The restructuring efforts cost it $10.3 million in operating profits in the third quarter with an additional $5.3 million expected in future quarters. Most importantly, its selling, general and administrative expenses in the third quarter were 16.6% of revenue, 270 basis points lower than in the same quarter last year. On a dollar basis, they dropped $1.55 million or 7.2%. That's progress.

SEE: Pension Plans: Pain Or Pleasure?

Free Cash Flow

Hidden deep in its quarterly report is the realization that American Woodmark's free cash flow in the first nine months of the year improved by 214% to $5.8 million from negative $5.1 million in 2011. Even though it's producing a loss, it's generating more than enough cash to keep the machines turned on and running. However, in a smart move to conserve cash, it suspended its quarterly dividend last August and although it's clear the dividend won't be reinstated any time soon; when it is, the markets will respond favorably. Being ahead of the curve should result in an even greater return on your investment.

SEE: Your Dividend Payout: Can You Count On It?

The Bottom Line

Masco (NYSE:MAS), which produces the Kraftmaid brand of cabinets and is significantly larger than American Woodmark, announced a profit in the first quarter ending March 31, its first for that quarter in several years. It believes its business is improving and remains cautiously optimistic about the rest of the year. In the past five years, American Woodmark's stock has performed almost identically to Masco's, which is up almost 40% year-to-date. Meanwhile, American Woodmark is only up about 20%. Another decent earnings report and its stock will begin to move. Just don't bet the house on it.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center