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A Long-Term Play on Housing Recovery
07/13/2009 11:11 am EST
George Putnam of The Turnaround Letter writes that Armstrong's profitable business has weathered the storm with its prospects intact.
From its roots as a small cork cutting shop in Pittsburgh founded in 1860, Armstrong World Industries (NYSE: AWI) has grown into a global manufacturer of flooring products and ceiling systems for all different types of buildings. In the US it also produces kitchen and bathroom cabinets.
In earlier decades, some of Armstrong’s products used asbestos. This led to a large number of lawsuits against the company, and the asbestos liability eventually drove the company into Chapter 11 in 2000. Like many asbestos bankruptcies, Armstrong’s Chapter 11 proceedings were quite prolonged, but the company finally emerged in October 2006. The company flourished for a brief time after emerging from bankruptcy, but then the slowdown in housing and other construction began to reduce demand for many of its products. After peaking in the high 50s in mid-2007, the stock drifted lower until it was pushed down sharply by the broad market weakness in late 2008.
Armstrong represents a relatively conservative way to bet on a rebound in the housing and construction sectors. It has a strong stable of products that is well diversified in terms of end-user and geographical market segments. Moreover, Armstrong has a dominant position in many of its markets. And its position could become even more dominant as many smaller competitors are washed out by the downturn. In addition to a powerful brand name, Armstrong has a further advantage because its scale and modern facilities make it the low-cost producer in many of its business lines. It is also aided by having manufacturing facilities well-located around the globe, including a plant in China.
On the financial side, Armstrong is very strong. The balance sheet is solid, with $300 million in cash and less than $500 million of debt. Even with revenues down, the company is still generating plenty of cash flow. The stock’s valuation is quite attractive at only about 3.5 times EBITDA (a measure of cash flow).
It may be a while before the construction markets improve, but when they do, Armstrong is very well positioned to take advantage of the rebound. We recommend buying Armstrong stock up to 25.
Investors looking for another, similar way to play a construction recovery should consider Owens Corning (NYSE: OC), which makes insulation, roofing and other building products. Owens has a similar history, including an asbestos-related Chapter 11 case that ran from 2000 to 2006. It also has many of the characteristics that we like about Armstrong, but we picked Armstrong as the purchase recommendation because of its slightly stronger balance sheet.
Disclosure Note: Accounts managed by an affiliate of the Publisher own Armstrong and Owens Corning stock.
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