The building boom in residential housing is no secret. Houses were in short supply even before the pandemic, and we’re still millions of houses short of demand.
After all, once “work from home” became a thing, folks decided to trade in their small, expensive apartments for nicer houses in the suburbs.
And of course, millennials are now starting to engage in family formation, which is also creating demand for housing. These two major sources of demand aren’t going anywhere.
Then, when you look at existing homes, the vast majority are owned by people who are over 60 years old who have absolutely no interest in moving. With high demand and very limited supply, there’s going to be a lot of building for years to come.
That’s been driving demand for the companies that sell all of the components that go into building a home. And even though parts of the commercial building market are slow as people continue to work from home, there’s massive demand for warehouse and shipping space and other industrial real estate.
And in those cities where people are moving to, there is demand for office space as well as a lot of demand for multi-family housing. So, building demand is with us, and I don’t think it’s going away any time soon.
This should help accelerate the turnaround of a company that is in the building supply business where the former management made a lot of stupid mistakes that really hurt the company.
Armstrong Flooring, Inc.
The company I’m talking about is Armstrong Flooring, Inc. (AFI), which sells flooring. It’s a simple business that got too fancy.
They decided to rely entirely on distributors and got rid of their direct sales force, which was a disastrous move. There’s a huge “people” component to the building products industry, as you need to be out there talking up your products to distributors and end users and getting it into peoples’ hands.
So, they brought in a guy named Michel Vermette to be the new President & CEO who’s been in the flooring business for decades. He was previously a top-level executive at Mohawk Industries, Inc. (MHK), one of the leading flooring companies in the country.
He’s taken over Armstrong and is set to get it back on track. He’s already brought in some direct sales reps, ended a bad relationship with one distributor and brought a couple of others in and they gave most of the business to this newly created, newly trained direct sales force.
They’re going to be pushing these products now, so we should start to see revenues and profits take off. The second quarter showed 15% year-over-year growth, which is a good start, and 13% sequential growth from the first quarter of 2021. So, the turnaround is starting to take hold.
The company should also get a big tailwind because its products are made in the USA. People like buying USA-made products. They do have operations in China and Australia, but 80% of their products are made and sold in the United States.
This could be a massive turnaround in the making, and I think the stock price could go up by as much as three to four times the current stock price. The stock is only trading 30% of its book value, so when you look at the asset value of the company, the fact that the turnaround is happening and the new CEO is executing on his plans for the business, then you can get pretty excited about this opportunity.
There’s also been some insider buying, and several insiders, including the CEO, have exercised stock options, paid the option price and kept the stock. That is a wildly bullish sign for the future of this company.
And don’t forget… There are powerful economic tailwinds in play that are going to help accelerate the turnaround of this company.
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