If you’re an American of a certain age who attended public school, you probably remember that school ceiling tiles often served as landing pads for sharp-pointed pencils launched by class hooligans.
But ceiling tiles are serious business for Armstrong World Industries (NYSE: AWI). It controls an estimated 50%-60% of the market for that product in the U.S. It sells the tiles, specialty wall and metal products for construction of non-residential buildings. That includes offices, schools, hospitals and data centers.
Barron’s makes a bull case for the stock. “Armstrong is becoming an indispensable part of the U.S. commercial construction industry,” writes Barron’s Jacob Sonenshine. “Its dominant market position makes it easier to cross-sell to existing clientele.” Its products can complement each other for almost any customer request, he notes.
“This helps the company deepen its relationships with architects and retailers such as Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW),” Sonenshine said.
Narrow focus seen as advantage
Armstrong has just two operating segments. One is Mineral Fiber, which consists of ceiling tiles and accounted for 61% of the company’s $472 million sales total for the second quarter. Architectural Specialties includes other ceiling and wall products, making up the remaining 39% of Armstrong’s sales.
Sonenshine posits that Armstrong’s narrow focus has helped it gain market share over more diversified competitors. Armstrong’s hefty share makes it less economically sensitive than its peers, he says. Its annual sales growth has been less volatile than competitors since its first full year as a public company in 2007.
As a result, Armstrong’s average unit value, revenue realized per unit sold, has risen in all of the last 10 years, except 2020, Sonenshine points out. AUV is a proxy for Armstrong’s prices. Its revenue has climbed every year since 2022, unlike competitors Builders FirstSource (NYSE: BLDR) and Martin Marietta Materials (NYSE: MLM).
Rising interest rates, which depress building construction, have hurt Armstrong and other construction stocks in recent weeks. Construction spending dipped 0.5% in July from June and 3.8% from a year earlier. Armstrong’s shares have dropped 6.6% in the past month.
Armstrong’s resilience
But Sonenshine believes Armstrong can drive through its headwinds. “It has strengthened its market position and relationships with architects,” he explains. “Its strong financial position will allow it to further invest in those relationships.” He cited this year’s purchase of Eventscape, a design and fabrication company, as an example.
Armstrong posted a year-on-year revenue increase of 11.2% in the second quarter, and its net income per share gained 12.4%. It raised all its earnings estimates for full-year 2026, forecasting a revenue gain of 9% to 11%.
Its stock has produced an annualized total return of 32% over the past three years, compared to 23% for the S&P 500.
Clearly the company has strong fundamentals. But given the uncertainty surrounding interest rates, a rising share price is no slam dunk.
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