Armstrong Flooring, Inc. AFI
September 21, 2016 - 1:59pm EST by
rjm59
2016 2017
Price: 18.60 EPS 0 0
Shares Out. (in M): 28 P/E 0 0
Market Cap (in $M): 517 P/FCF 0 0
Net Debt (in $M): -4 EBIT 0 0
TEV ($): 513 TEV/EBIT 0 0

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Description

 

Learning about the flooring business is about as exciting as watching paint dry. That being said, you’d be floored to realize that Armstrong Flooring (“AFI”), which has a leading market share position within hardwood is trading at a significant discount among its peers.

AFI represents a strong risk / reward offering: recently spunoff, strong balance sheet, strong shareholders, and a new management team that should reap the benefits of operational improvements in a gowing market.

Company

Armstrong Flooring, Inc. is the largest North American producer of resilient and wood flooring products. Its products are used in construction and renovation of residential, commercial and institutional buildings. The Company designs, manufactures and sells its diverse range of products throughout North America and the Pacific Rim.

The team is highly incentivized to hit its EBITDA targets, per the Company’s Form 10:  The number of common shares reserved and available for awards under the 2016 LTIP will be 5,500,000 shares. Currently 27.8 million shares outstanding.

Industry

Flooring industry is highly fragmented with 9 players controlling 60% of the market. Competitors include: Manington, Mohawk, Shaw, Congoleum. With an exposure of 65% of revenues towards residential (balance weighted towards commercial), one can find positive trends in Consumer Confidence, Single Family Housing Starts, and Existing Home Sales.

Despite recent increases in square footage sold over the last few years, Mowhawk cites Floor Covering Weekly in their recent Q2 investor presentation which finds the market to be “27% below 2005 peak.”

It should also be noted that Mohawk has been highly acquisitive in the past at levels that far exceed the current AFI multiples.

Opportunity

On the heels of operational improvements, a new management team, and a growing LVT brand, this stock trades at only 7.1X EV / EBITDA (midpoint of mgmt. expectations).

With its new management team, the Company has recently moved its LVT plant from China to the US so as to exploit its fastest growing and highest margin product line. IR team estimates utilization to be as low as 60% across its 17 plants.

With Raging Capital (founded in 2006 and compounded at ~21% annually) and Valueact as partners, we are in good hands. This is not an insignificant position for Raging Capital amassing close to a 7% position and one of his largest positions.

A recent grab from an interview Raging did with Value Investor in 5/16 after reporting close to a 10% holding in AFI:

American housing stock continues to age, nearing 40 years old, up from only 25 years old in the 1980s. We think this all sets up well for building products providers…As production expands in higher growth categories, we expect EBITDA to increase from around $80 million this year to about $100 million in 2017 and $120 million in 2018. Using our 2017 estimate, the shares on an enterprise value basis trade at just 5x EBITDA. That’s well below the 9x peer-company level, which we consider reasonable for AFI as the market becomes better acquainted with the newly independent company and as results improve.

This is in line with management’s self imposed edict of 3-5 year Revenue growth and EBITDA margin of 5.5% and 10%.

 

Given the strong margin of safety with the company’s balance sheet and positive tailwinds in the form of industry dynamics, operational improvements by its turnaround management team we find AFI to be a compelling opportunity at these levels.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Earnings performance

Growth of LVT

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    Description

     

    Learning about the flooring business is about as exciting as watching paint dry. That being said, you’d be floored to realize that Armstrong Flooring (“AFI”), which has a leading market share position within hardwood is trading at a significant discount among its peers.

    AFI represents a strong risk / reward offering: recently spunoff, strong balance sheet, strong shareholders, and a new management team that should reap the benefits of operational improvements in a gowing market.

    Company

    Armstrong Flooring, Inc. is the largest North American producer of resilient and wood flooring products. Its products are used in construction and renovation of residential, commercial and institutional buildings. The Company designs, manufactures and sells its diverse range of products throughout North America and the Pacific Rim.

    The team is highly incentivized to hit its EBITDA targets, per the Company’s Form 10:  The number of common shares reserved and available for awards under the 2016 LTIP will be 5,500,000 shares. Currently 27.8 million shares outstanding.

    Industry

    Flooring industry is highly fragmented with 9 players controlling 60% of the market. Competitors include: Manington, Mohawk, Shaw, Congoleum. With an exposure of 65% of revenues towards residential (balance weighted towards commercial), one can find positive trends in Consumer Confidence, Single Family Housing Starts, and Existing Home Sales.

    Despite recent increases in square footage sold over the last few years, Mowhawk cites Floor Covering Weekly in their recent Q2 investor presentation which finds the market to be “27% below 2005 peak.”

    It should also be noted that Mohawk has been highly acquisitive in the past at levels that far exceed the current AFI multiples.

    Opportunity

    On the heels of operational improvements, a new management team, and a growing LVT brand, this stock trades at only 7.1X EV / EBITDA (midpoint of mgmt. expectations).

    With its new management team, the Company has recently moved its LVT plant from China to the US so as to exploit its fastest growing and highest margin product line. IR team estimates utilization to be as low as 60% across its 17 plants.

    With Raging Capital (founded in 2006 and compounded at ~21% annually) and Valueact as partners, we are in good hands. This is not an insignificant position for Raging Capital amassing close to a 7% position and one of his largest positions.

    A recent grab from an interview Raging did with Value Investor in 5/16 after reporting close to a 10% holding in AFI:

    American housing stock continues to age, nearing 40 years old, up from only 25 years old in the 1980s. We think this all sets up well for building products providers…As production expands in higher growth categories, we expect EBITDA to increase from around $80 million this year to about $100 million in 2017 and $120 million in 2018. Using our 2017 estimate, the shares on an enterprise value basis trade at just 5x EBITDA. That’s well below the 9x peer-company level, which we consider reasonable for AFI as the market becomes better acquainted with the newly independent company and as results improve.

    This is in line with management’s self imposed edict of 3-5 year Revenue growth and EBITDA margin of 5.5% and 10%.

     

    Given the strong margin of safety with the company’s balance sheet and positive tailwinds in the form of industry dynamics, operational improvements by its turnaround management team we find AFI to be a compelling opportunity at these levels.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    Earnings performance

    Growth of LVT

    Messages


    SubjectI don't get it
    Entry09/23/2016 04:10 PM
    Memberblaueskobalt

    Cyclical, low-margin, low-return, capital-intensive, poorly positioned within the industry, sub-5% FCF yield, and management is poised to dilute you 20% if everything goes well.

    Is this just about momentum (cycle) and the hope of a Mohawk buyout?


    SubjectThoughts re: Consolidation
    Entry03/06/2017 02:32 PM
    MemberHamilton1757

    Thanks for write up. Trying to get up to speed on this one after weak guidance.

    Have you done any work around the probability and/or price that MHK/Shaw would pay given potential synergies, historical multiples, etc. Obviously, they have both been aggressive acquirers of flooring assets, especially in Hard surface, but have been disciplined buyers, from what I recall.

    Would the company have to wait the 2 years post spin? Is there anything singluar to AFI that makes it unattractive (mix, etc) to one of those players?

    Clearly, AFI has been having substantial challenges since it was part of AWI. It seems unrealistic to expect that they can reverse this and I doubt shareholders want to bleed value indefinititely. Typcially not really that focused on potential take-out scenarios, but given the industry structure, it seems like that is really the only way to win in this investment. 

    Any thoughts welcome.

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