Armstrong World (AWI) To Sell EMEA & Pacific Rim Businesses

Shares of Armstrong World Industries, Inc. (NYSE:AWI) gained nearly 7% to close at $53.85 on Nov 20, after the company declared that it has signed a definitive agreement to divest its EMEA (Europe, the Middle East and Africa) and Pacific Rim businesses. This move will allow the company to focus on investments and resources on its core Americas ceilings and walls businesses.

About the Deal

Armstrong World has a joint venture (JV) with Worthington Industries, Inc. (NYSE:WOR) known as Worthington Armstrong Venture or WAVE, in which both hold a 50% interest. This 25 years old JV employs over 600 people and operates nine manufacturing locations in five countries to produce suspension system (grid) products. Per this deal, Armstrong World plans to sell its businesses in EMEA and the Pacific Rim of its WAVE venture as well as Armstrong France and WAVE France to Knauf International GmbH for an enterprise value of $330 million.

In the third quarter of 2017, net earnings of WAVE declined 25% year over year. The downturn was mainly due to higher input costs, particularly steel and increased investment in selling expenses. Furthermore, WAVE international business was challenging in the past due to concerns regarding European economy including Brexit.

Therefore, the divestment is expected to help Armstrong World to focus on investment and innovation in high end mineral fiber manufacturing along with expanding capabilities in Architectural Specialties. The company also stated that the exit from EMEA and the Pacific Rim is a significant step of an ongoing transformation plan.

The company’s current guidance for the EMEA and Pacific Rim businesses projects sales is at about $425 million 2017, with adjusted EBITDA of around $22 million.

The transaction is subject to regulatory approvals as well as other customary conditions, and expects to complete in mid-2018. Armstrong World anticipates to realize around $250 million of net cash following the close of the deal and return majority of the net proceeds to shareholders, in a manner and timing to be approved by its board of directors.

Outlook

Armstrong World expects revenues for 2019 will be over $1 billion and adjusted EBITDA margins to be more than 40%.

Share Price Performance

Armstrong World has outperformed the industry in a year. While the stock has gained around 30.3%, the industry recorded growth of 18.2%.

Zacks Rank & Key Picks

Armstrong World holds a Zacks Rank #2 (Buy). Some other top-ranked stocks in the same sector include Patrick Industries, Inc. (NASDAQ:PATK) and United Rentals, Inc. (NYSE:URI) sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Patrick Industries has a long-term earnings growth rate of 10.6%. Its shares have been up 20.2% year to date.

United Rentals has a long-term earnings growth rate of 15.6%. So far this year, its shares have rallied 43.4%.

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