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.

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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.

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