Knock on wood

Entrepreneur, Dec, 1997

THE COMPANY: As one of the largest U.S. kitchen cabinet manufacturers, Winchester, Virginia-based American Woodmark Corp. assembles cabinets and sells them in stores like 84 Lumber, The Home Depot and Lowe's. A vertically integrated manufacturer, the company not only constructs its cabinets but also processes the lumber. It sells 60 percent of its cabinets to people remodeling their homes and 40 percent to home builders.

The markets: Kitchen cabinet manufacturing is a slow-growth industry. Still, American Woodmark is an interesting investment because of its consistent market-share gains, profit-margin improvement and willingness to explore new markets.

Though the cabinet industry was affected by hardwood price increases this year, American Woodmark increased profit margins due to its vertically integrated manufacturing and 16 percent annual gains from new equipment and manufacturing techniques. As the only publicly traded cabinet company, American Woodmark can use its shares as currency to expand its market share through acquisitions, a luxury its competitors don't have.

The sizzle: American Woodmark has produced huge earnings growth even after increasing spending on sales and marketing. The company accomplished this with investments made in 1995 and 1996 in a new plant, property and equipment, which have enabled it to increase sales without requiring further expansion. Though the company grows sales slowly, it can actually benefit from that strategy, building enough manufacturing capacity to handle sales for several years and improving margins along the way as productivity increases.

The Outlook
Past and projected sales and earnings

Fiscal Year               1996    1997    1998(*)   1999(*)

Revenues ($M)             $196    $219       $247      $275
Net income ($M)           $3.8   $10.5      $11.8     $13.1
Earnings per share       $0.51   $1.37      $1.56     $1.74
Shares outstanding (M)     7.6     7.6        7.6       7.6

* Estimated