From the December 1997 issue of Entrepreneur

The company: As one of the largest U.S. kitchen cabinet manufacturers, Winchester, Virginia-based American Woodmark Corp. assembles cabinets and sells them in stores like 84 Lumber, The Home Depot and Lowe's. A vertically integrated manufacturer, the company not only constructs its cabinets but also processes the lumber. It sells 60 percent of its cabinets to people remodeling their homes and 40 percent to home builders.

The markets: Kitchen cabinet manufacturing is a slow-growth industry. Still, American Woodmark is an interesting investment because of its consistent market-share gains, profit-margin improvement and willingness to explore new markets.

Though the cabinet industry was affected by hardwood price increases this year, American Woodmark increased profit margins due to its vertically integrated manufacturing and 16 percent annual gains from new equipment and manufacturing techniques. As the only publicly traded cabinet company, American Woodmark can use its shares as currency to expand its market share through acquisitions, a luxury its competitors don't have.

The sizzle: American Woodmark has produced huge earnings growth even after increasing spending on sales and marketing. The company accomplished this with investments made in 1995 and 1996 in a new plant, property and equipment, which have enabled it to increase sales without requiring further expansion. Though the company grows sales slowly, it can actually benefit from that strategy, building enough manufacturing capacity to handle sales for several years and improving margins along the way as productivity increases.

The risks: With no brokerage analysts covering the company and only 15.1 percent of the shares held by institutions, the stock is certainly not overexposed. However, any exposure to the cyclical housing market is not a plus. Growth could falter if interest rates rise.

Historical financial performance: The value of the margin improvement is more than theoretical-it's the principal reason American Woodmark shares have risen an average of 46 percent annually over the past five years. The recent rise in profit margins from 2 percent in fiscal 1996 to closer to 5 percent in the first two quarters of 1997 is largely due to these productivity improvements, which allowed the company to produce sustained earnings-per-share growth of more than 20 percent over the past five quarters. Debt as a percentage of shareholder's equity has dropped dramatically, and the company recently instituted a dividend to celebrate this-in late August, the dividend increased 50 percent to $0.03 per share after another round of record results.

Projected financial performance: With the stock trading at 11 times earnings per share over the past four quarters, the price/earnings ratio is still reasonable compared to the company's recent earnings growth. Short of catastrophe, with only moderate sales growth in 1998, the company can earn $1.56 earnings per share in fiscal 1998 and $1.74 in fiscal 1999. If the stock begins trading at 12 times earnings per share-a reasonable expectation-the stock would sell at $21, or 17.8 percent annualized growth over the next two years.


The Motley Fool can be found on the Web at www.fool.com and on AOL at keyword: FOOL. Randy Befumo contributed to this article. The above opinions are those of the authors and not of Entrepreneur. Past performance is no guarantee of future results.

At A Glance

Name: American Woodmark Corp.
Recent Price: $16
Price/earnings ratio: 11
Market: Nasdaq
Symbol: AMWD
Figures are as of September 4, 1997

The Outlook

Past and projected sales and earnings.

Fiscal Year 1996 1997 1998* 1999*
Revenues ($M) $196 $219 $247 $275
Net income ($M) $3.8 $10.5 $11.8 $13.1
Earnings per share $0.51 $1.37 $1.56 $1.74
Shares outstanding (M) 7.6 7.6 7.6 7.6

Contact Sources

American Woodmark Corp., Investor Relations Department, 3102 Shawnee Dr., Winchester, VA 22601, (540) 665-9112