What a brutal six months it’s been for American Woodmark. The stock has dropped 41.6% and now trades at $39.52, rattling many shareholders. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy American Woodmark, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think American Woodmark Will Underperform?
Even with the cheaper entry price, we don't have much confidence in American Woodmark. Here are three reasons you should be careful with AMWD and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. American Woodmark struggled to consistently generate demand over the last five years as its sales dropped at a 1.8% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect American Woodmark’s revenue to drop by 8.6%, close to its 1.8% annualized declines for the past five years. This projection doesn't excite us and suggests its newer products and services will not catalyze better top-line performance yet.
3. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for American Woodmark, its EPS declined by 9.9% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of American Woodmark, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 26× forward P/E (or $39.52 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at a top digital advertising platform riding the creator economy.
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