We added to our investment in AWI during the first quarter when the market declined and AWI’s stock price went with it, becoming more attractive with every tick downward. There are legitimate headwinds – a strong dollar, weak emerging markets, tepid domestic demand – but I find that Armstrong’s ceilings segment is still an excellent business and I continue to believe we own it at an attractive price. The recently reported 2015 results and outlook for 2016 affirmed my view – high margins, little competition, excellent returns on capital and copious free cash flow. I also took advantage of an opportunity to meet the incoming CEO, Vic Grizzle, and I believe he will act to preserve AWI’s current advantages. AWI is our largest investment as of this writing.
In April the company completed the spinoff of its struggling flooring business (now a separate business traded under the ticker “AFI”). Despite the turnaround potential or an outright sale of the business – neither of which, in my opinion, is likely any time soon – I sold all of the shares we received. Flooring is almost the inverse of the ceilings business. The competition is vicious, pricing power is nil, margins are low, returns on capital are subpar, and free cash flow is hard to find. The balance sheet is reasonable and AFI has some time to make changes, but history and the current state of affairs make for an uphill battle.
The above commentary is excerpted from the 1Q16 quarterly letter of Anabatic Investment Partners LLC. The fund’s Managing Principal and Portfolio Manager is Philip C. Ordway. Please note that the complete text of the disclaimer included with the fund’s quarterly letter is also reproduced below.
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