Armstrong World (AWI) Rides On Inorganic Strategy, Costs High

Armstrong World Industries, Inc.’s (NYSE:AWI) systematic inorganic strategy, robust price realization and investment in new products bode well for future growth prospects. Also, solid segmental performance along with favorable average unit values ("AUV") are likely to aid its bottom line. However, raw-material cost inflation and operational headwinds remain causes of concern.

Meanwhile, Armstrong World’s shares have gained 33% in a year’s time against its industry’s decline of 17.2%.

Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

Catalyst Driving Growth

Armstrong World is focused on strategic acquisitions to enhance its portfolio. On Aug 16, 2018, it acquired Steel Ceilings (“SCI”), which is a Johnstown, OH-based manufacturer of aluminum and stainless metal ceilings. The acquisition will boost Armstrong World's overall growth in the fields of architectural, radiant and security solutions. Moreover, in November 2018, it divested EMEA and Pacific Rim businesses to Knauf, which constitutes significant part of the company’s ongoing transformation plan.

Additionally, Armstrong World’s robust price realization and investment in new products will continue boosting growth. Over the past few quarters, the company has been implementing higher prices to offset the negative impact of higher input costs, including extra freight activity.

Armstrong World has been strategically investing in new products, sales and support services, as well as advanced manufacturing capabilities. As part of the above-mentioned initiative, the company launched Sustain, Total Acoustics and DESIGNFlex to fortify its Mineral Fiber category. Also, it concluded $100-million investment to support volume and AUV growth in the Mineral Fiber unit. These launches have experienced extraordinary rates of adoption by architects, and are likely to continue in the long run.

On the back of the above-mentioned moves, Armstrong World’s net sales grew 8.4% in the first nine months of 2018. Adjusted EBITDA grew 9.3% and adjusted EBITDA margin expanded 30 basis points year over year during the same time frame, courtesy of higher volume, price, and mix. Going forward, the company expects EBITDA improvement of more than 10% for the year. It also raised the midpoint of its adjusted EPS range to $3.72 for the full year.

Causes of Concern

Armstrong World has been experiencing higher freight and raw material costs since the last few quarters. The steel and aluminum tariffs announced earlier in 2018 continued to impact its material costs. During the first nine months of 2018, its operating income declined to $196.9 million from $200.4 million a year ago.

Steel cost headwinds at WAVE kept annual EBITDA growth below its double-digit expectation.

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector are Armstrong Flooring, Inc. (NYSE:AFI) , PGT Innovations, Inc. (NYSE:PGTI) and Comfort Systems USA, Inc. (NYSE:FIX) , each sporting a Zacks Rank #1 (Strong Buy). You can also see the complete list of today’s Zacks #1 Rank stocks here.

Armstrong Flooring’s earnings for the current year are expected to increase 114.3%.

PGT Innovations is expected to record an earnings growth rate of 91.8% in 2018.

Comfort Systems surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with average earnings surprise of 16.5%.

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