Last week, Armstrong Flooring (AFI) reported third quarter results. For background information on the company, refer to my earlier post: https://stockspinoffinvesting.com/armstrong-flooring-stock-spinoff-with-138-upside/
My original investment case for AFI in a nutshell is as follows. AFI sells flooring material which is benefiting from a strong US housing market. While the flooring market has rebounded, it remains 30% below prior peak levels. On the margin front, AFI has much room for improvement. AFI was spun out with EBITDA margins of ~6.0% but management is excellent and has a plan to get margins back to the ~10% range. At the time of the spinoff, the stock traded at an EV/EBITDA multiple of 7.0x while peers traded at ~11.0x. Assuming revenue grows 5% in each of the next three years, EBITDA margins expand to 10% and AFI’s valuation expands to 9.0x EBITDA, the stock will trade for ~$37 (it trades at $18.50 now). Additionally, the flooring market is consolidating. Mohawk Industries, the market leader, has spent $3.5bn on acquisitions and has historically acquired smaller competitors at an EV/Revenue multiple of 1.7x to 2.6x. AFI currently trades at 0.5x.
There were some positives and negatives in the quarter. First the positives….