American Woodmark No Longer Deserves to Be Taken to the Woodshed

Check out the table below and you'll have no doubt that American Woodmark Corp. is a proven growth stock. If this year's estimates prove accurate earnings per share will have grown almost 1,000% since 2012. Other major business metrics were also quite impressive for the maker of kitchen cabinets and vanities. Continuous shareholders must be happy, yet the stock was much higher during each of the past five years, including 2021 year to date. Investors buying in today are getting a bargain. American Woodmark's nine-year, 366% run-up represents less than 38% of the increase in EPS over that span. I'll explain a bit later why American Woodmark weakened recently and why it's almost certainly ready to climb once again. First, a bit of share price history. American Woodmark got a bit ahead of itself in early 2018 when the shares fetched over $148. Even with all-time record EPS on tap in the fiscal year ended April 30, 2018, AMWD was trading for 21.5x earnings. That was a higher-than-typical valuation. The Federal Reserve started tightening rates in the fall of 2018. You might remember the harsh words that then-President Trump had for the Fed Chairman Jerome Powell regarding those interest rate hikes. From around Thanksgiving of that year right through Christmas Eve, the whole market sold off almost every trading day. AMWD bottomed back then at $53.30, less than 8x trailing 12-month EPS. From that depressed valuation the stock took off. It rebounded to almost $118 just ahead of the COVID crisis. Both American Woodmark's shares and profits dipped sharply during the virus-related retail shutdowns. As business rebounded, so did AMWD. It changed hands near $109 as recently as March 12. What took this fine company's stock down again? Skyrocketing lumber prices. Wood is the primary raw material used in building American Woodmark's products. Orders that were paid in full needed to be honored at the prices paid, regardless of the spike in lumber. Absorbing the higher cost of goods sold dented American Woodmark's fiscal fourth-quarter results. That's what sent the shares tumbling from $108.80 to about $80 intraday last Friday, June 18, as the Dow Jones Industrial Average was dropping 533 points. Now for the good news. Management quickly instituted price hikes in response to rising lumber expense. New orders are being fulfilled at those more profitable levels. Lumber's run-up has dissipated quickly. The chart below shows that, as of last Friday, wood futures were right back to where they were last September. The new higher prices are likely to stick, though, making American Woodmark more profitable than ever before. EPS estimates are rising. In the fiscal year that ends next April 30, American Woodmark is now projected to deliver EPS of $7.28. The following year is now penciled in at $8.66 by Yahoo Finance. Both would exceed any previous totals. A return to even a 17xs multiple on the current year's projection suggests a 12-month target price near $124. Reaching that very logical goal would provide a gain of greater than 83% from AMWD's current quote. My target is not far-fetched. American Woodmark peaked between $108.80 and $148.40 during each of the last five years, including this year. The expected EPS that appear ready to pop easily could send the stock even higher than my goal. American Woodmark is a high-beta name. When it moves, it often moves quite sharply. The early 2016 low was a prelude to a 160%, 23-month rise. Its December 2018 nadir led to a nearly 121% 13-month rebound. AMWD's COVID-induced panic bottom preceded a bounce-back of better than 208%. It's time to get on board this train once again. Yahoo Finance takes a positive yet overly conservative view on American Woodmark's year-ahead prospects. Its modest goal of $102.25 seems laughably low in light of the recent decline in lumber prices. Even so, making 24% in a year will double your money in about three years on a pretax basis. Research from FastGraphs is more in line with my own assessment. It sees AMWD reaching from $110.69 to $142.67 by next April 30, the end of its current fiscal year. Barring unexpected problems American Woodmark appears poised for a large upward move. Buying shares outright is the easiest way to play for unlimited upside. Option-minded traders can nibble at the edges via sales of puts out to Dec. 17, 2021, or Jan. 21, 2022. The data below details actual pricing for AMWD's six-month duration $75 to $95 strike price puts with the stock at $82.60. Worst-case, forced-purchase prices dropped a range of $69.40 to $77.70 depending on the strike price(s) utilized. Those who believe AMWD is headed much higher should have little fear of owning it from 5.9% to 16% cheaper than its already-tempting price. American Woodmark clearly belongs on my best buy list. I've made money with it on multiple occasions, including the following recommendation from June 18, 2020. The best-case scenario on the Jan. 2021 $75 buy/write combination was easily achieved, generating an 82.2%, seven-month return (141.8% annualized). AMWD closed on Jan. 15, 2021, at $96.66, more than $21 above the needed strike price. The recent pullback appears totally unjustified. Buy some AMWD shares, sell some AMWD puts or consider initiating brand-new buy/write combinations out to January 2022.

American Woodmark No Longer Deserves to Be Taken to the Woodshed

The maker of kitchen cabinets and vanities should benefit from now-receding lumber prices and price hikes for its own products.

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