Armstrong World (AWI)

Ceiling and wall solutions company Armstrong World Industries (NYSE:AWI) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 17.3% year on year to $382.7 million. The company expects the full year’s revenue to be around $1.59 billion, close to analysts’ estimates. Its non-GAAP profit of $1.66 per share was 8.7% above analysts’ consensus estimates.

Company Overview

Started as a two-man shop dating back to the 1860s, Armstrong (NYSE:AWI) provides ceiling and wall products to commercial and residential spaces.

Traditionally, building materials companies have built competitive advantages with economies of scale, brand recognition, and strong relationships with builders and contractors. More recently, advances to address labor availability and job site productivity have spurred innovation. Additionally, companies in the space that can produce more energy-efficient materials have opportunities to take share. However, these companies are at the whim of construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of building materials companies.

Competitors offering wall and ceiling solutions include Saint-Goabin (EPA:SGO.PA) and private companies Hunter Douglas and USG Corporation.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Armstrong World’s sales grew at a decent 7.5% compounded annual growth rate over the last five years. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Armstrong World’s annualized revenue growth of 9.2% over the last two years is above its five-year trend, suggesting its demand recently accelerated. Armstrong World recent performance stands out, especially when considering many similar Building Materials businesses faced declining sales because of cyclical headwinds.

This quarter, Armstrong World reported year-on-year revenue growth of 17.3%, and its $382.7 million of revenue exceeded Wall Street’s estimates by 3.4%.

Looking ahead, sell-side analysts expect revenue to grow 7.1% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and implies its products and services will see some demand headwinds.

Armstrong World’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 37.8% gross margin over the last five years. Said differently, roughly $37.81 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

This quarter, Armstrong World’s gross profit margin was 39.2%, up 1.1 percentage points year on year. Armstrong World’s full-year margin has also been trending up over the past 12 months, increasing by 1.6 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Armstrong World has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 24.6%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Armstrong World’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Armstrong World generated an operating profit margin of 25.7%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Armstrong World’s EPS grew at an unimpressive 6.2% compounded annual growth rate over the last five years, lower than its 7.5% annualized revenue growth. However, its operating margin didn’t change during this time, telling us that non-fundamental factors such as interest and taxes affected its ultimate earnings.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Armstrong World, its two-year annual EPS growth of 16.6% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q1, Armstrong World reported EPS at $1.66, up from $1.38 in the same quarter last year. This print beat analysts’ estimates by 8.7%. Over the next 12 months, Wall Street expects Armstrong World’s full-year EPS of $6.60 to grow 8.7%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Armstrong World has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 19.4% over the last five years.

Taking a step back, we can see that Armstrong World’s margin dropped by 2.2 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Armstrong World’s free cash flow clocked in at $48 million in Q1, equivalent to a 12.5% margin. This result was good as its margin was 3 percentage points higher than in the same quarter last year, but we note it was lower than its five-year cash profitability. Nevertheless, we wouldn’t read too much into a single quarter because investment needs can be seasonal, leading to short-term swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Armstrong World hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 21.6%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Armstrong World’s ROIC has increased over the last few years. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

Armstrong World reported $82.8 million of cash and $519.7 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $505 million of EBITDA over the last 12 months, we view Armstrong World’s 0.9× net-debt-to-EBITDA ratio as safe. We also see its $35.5 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Armstrong World beat analysts’ revenue expectations this quarter. We were also glad its EBITDA outperformed Wall Street’s estimates. On the other hand, its full-year EBITDA guidance slightly missed. Overall, this quarter had some key positives. The stock remained flat at $139 immediately after reporting.

Updated: July 27, 2025 at 11:08 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

There are some positives when it comes to Armstrong World’s fundamentals. First off, its revenue growth was decent over the last five years, and analysts believe it can continue growing at these levels. And while its organic revenue growth has disappointed, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits. On top of that, its impressive operating margins show it has a highly efficient business model.

Armstrong World’s P/E ratio based on the next 12 months is 23.5x. When scanning the industrials space, Armstrong World trades at a fair valuation. If you’re a fan of the business and management team, now is a good time to scoop up some shares.

Wall Street analysts have a consensus one-year price target of $170.56 on the company (compared to the current share price of $170).