Is Armstrong World Industries (AWI) A Smart Long-Term Buy?

Madison Funds, an independent investment management firm, published its fourth quarter 2020 “Madison Mid Cap Fund” investor letter – a copy of which can be downloaded here. A return of 15.54% was recorded by the fund’s Class Y shares in the fourth quarter of 2020, below its Russell Midcap benchmark that delivered a 19.91% return in the same period. You can view the complete list of the fund’s Average Annual Total Returns and its top 5 holdings to have a peek at their top bets for 2021.

Madison Mid Cap Fund, in their Q4 2020 investor letter, mentioned Armstrong World Industries, Inc. (NYSE: AWI) and emphasized their views on the company. Armstrong World Industries, Inc. is a Lancaster, Pennsylvania-based manufacturing company that currently has a $4.4 billion market capitalization. Since the beginning of the year, AWI delivered a 24.45% return, extending its 3-month gains to 24.64%. As of March 26, 2021, the stock closed at $92.58 per share.

Here is what Madison Mid Cap Fund has to say about Armstrong World Industries, Inc. in their Q4 2020 investor letter:

“Armstrong World Industries is the dominant maker of ceiling tiles with roughly 60% market share, well over twice the share of the second largest industry player. Most of its sales are to the commercial building market. With its vast scale, it has the lowest manufacturing costs, broadest selection of product, and the best distribution network, all of which combine to create a very wide moat that is impenetrable even to well-heeled competitors. As you might imagine with such high market share, it’s a highly cash generative business, with operating margins for the tile business in the high 20s when accounting for the metal grid accessories that are sold along with the tiles.

The strong cash flow is being stewarded by a discerning CEO whom we have thought highly of since we first met him several years ago when Armstrong had just become an independent company after years of conglomerate ownership. He’s led the company through a series of adept maneuvers since then as well, including a sale of its less advantaged European arm, intelligent share buybacks, and a series of judicious but shrewd acquisitions. We look forward to see what else he can accomplish despite a likely sluggish near-term outlook. The pandemic has depressed spending on commercial buildings, and it’s possible that a permanent increase in work-from-home employees will reduce long-term demand for office building space as well. We don’t have any brilliant insight on this, except that with its stock down 40% from its highs and trading at a very cheap price, we felt the market value more than reflected any such scenario.”

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Our calculations show that Armstrong World Industries, Inc. (NYSE: AWI) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Armstrong World Industries, Inc. was in 31 hedge fund portfolios, compared to 30 funds in the third quarter. AWI delivered a 16.10% return in the past 12 months.