A Warning Sign on American Woodmark Corporation (AMWD): Masco Corporation (MAS), Fortune Brands Home & Security Inc (FBHS)

American Woodmark Corporation (NASDAQ:AMWD) has generated a sweet return for its shareholders for more than a year. Since the end of 2011, its stock price has more than tripled, from $11 per share to $32 per share. Zacks has ranked the company as a strong buy. However, the stock seems to be quite expensive at 66.54 times forward earnings. Is American Woodmark expensive at its current price, or is it a good investment opportunity now? Let’s find out.

Masco Corporation (NYSE:MAS)

A business with huge customer concentration

American Woodmark, founded in 1980, is the manufacturer and distributor of kitchen cabinets and vanities for home construction activities, operating under several brand names such as American Woodmark Corporation (NASDAQ:AMWD), Timberlake, Shenandoah Cabinetry, and Potomac. The company sells its products through three main channels: home centers, builders, and independent dealers and distributors. It reported that the business has been quite seasonal, with higher sales in the second and fourth quarters.

What worries me about the company is the substantial customer concentration. In 2012, it had two primary customers — The Home Depot and Lowe’s Companies. Those two customers accounted for around 68% of its total sales in 2012.

In the past five years, the company had a widely fluctuating operating performance. Revenue declined from $602 million in 2008 to $516 million in 2012, while it generated a profit in just one of out of those five years. In 2008, it earned $4 million in profit, but in 2012, it incurred $21 million in losses. A good thing about American Woodmark is its conservative capital structure. As of January 2013, it had $140 million in total stockholders’ equity, $66 million in cash, and $24 million in debt. Thus, the net cash of the company was $42 million.

Might adopt aggressive revenue cognition

However, I noticed one warning sign in the company’s balance sheet. Since January 2012, while quarterly revenue increased 25.8% to $151 million, its receivables grew by 64%, from $25 million to $41 million. When receivables grow faster than revenue, it might indicate that the company is either using aggressive revenue recognition, or loosening its credit terms for customers.

Therefore, although net loss of $15 million in the fourth calendar quarter of 2011 changed into a profit of $5 million in the fourth calendar quarter of 2012, its cash flow from operations reduced significantly, from $13 million to only $3 million in the same period.

The most expensive among its peers

At the current trading price of $32 per share, American Woodmark Corporation (NASDAQ:AMWD) is worth $480 million on the market. The market seems to value the company at an expensive 25.1 times EV/EBITDA. Compared to its peers, including Masco Corporation (NYSE:MAS) and Fortune Brands Home & Security Inc (NYSE:FBHS), American Woodmark is the smallest company and has the most expensive valuation.