Shareholders of American Woodmark would probably like to forget the past six months even happened. The stock dropped 38% and now trades at $58.36. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in American Woodmark, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Despite the more favorable entry price, we're cautious about American Woodmark. Here are three reasons why we avoid AMWD and a stock we'd rather own.

Why Do We Think American Woodmark Will Underperform?

Starting as a small millwork shop, American Woodmark (NASDAQ: AMWD) is a cabinet manufacturing company that helps customers from inspiration to installation.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, American Woodmark grew its sales at a weak 1.2% compounded annual growth rate. This was below our standards.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for American Woodmark, its EPS declined by 1.2% annually over the last five years while its revenue grew by 1.2%. This tells us the company became less profitable on a per-share basis as it expanded.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, American Woodmark’s margin dropped by 5.7 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. American Woodmark’s free cash flow margin for the trailing 12 months was 2.2%.

Final Judgment

American Woodmark doesn’t pass our quality test. After the recent drawdown, the stock trades at 7.6× forward price-to-earnings (or $58.36 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Would Buy Instead of American Woodmark

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