If you invest in housing stocks, you need to read this cabinetmaker’s latest quarterly report.
American Woodmark (AMWD -10.79%) stock sold off hard on Tuesday morning, falling 11% through 12:30 p.m. ET after reporting a big earnings miss.
Ahead of the fiscal first-quarter 2025 report the company delivered before the opening bell, analysts had forecast the Virginia cabinetmaker would earn $2.40 per share on sales of $476.6 million. Instead, American Woodmark reported a profit of $1.89 per share and sales of $459.1 million.
American Woodmark fiscal Q1 earnings
Not all the news was bad. CEO Scott Culbreth blamed weak demand among home remodelers for the company’s 8% year-over-year decline in sales, noting that sales to homebuilders actually grew in the quarter.
Fair enough, but the company’s 32% decline in earnings was four times greater than its decline in sales. Why the large discrepancy?
Apparently, that was mainly because of an “unfavorable mark-to-market adjustment on our foreign currency hedging instruments” that cost the company $6.3 million — which doesn’t sound too serious.
More worrisome is the fact that the company’s free cash flow appears to be suffering even more than its earnings. While the company hasn’t yet filed its full 10-Q statement, which will give complete data on its capital spending, its operating cash flow in the quarter fell by more than half to just $40.8 million. This implies that when all the data is out, free cash flow at American Woodmark may end up falling even more sharply than net income.
Is American Woodmark stock a sell?
Trading at a price-to-earnings ratio of just 12.8 after its sell-off, American Woodmark looks pretty cheap — at least at first glance. When the full free cash flow data becomes available, however, I estimate the company’s price-to-free-cash-flow ratio is going to be closer to 17.3.
That’s still not too terribly high. But with management warning of a “recent slowdown in new construction single-family starts” on top of the weakness in remodels, and revenue down by at least single-digit percentages this year, it’s probably best to be cautious about this stock.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.