Upcoming Product Launches And Recycling Efforts Will Expand Market Reach And Improve Margins

Key Takeaways

• Product innovations like TimberTech and Versatex are set to expand AZEK's market and boost future revenue streams.
  
• Strategic recycling capabilities and continuous improvement programs aim to enhance margins and decrease input costs.
  
• Market uncertainties, start-up investments, and increased costs could pressure AZEK's margins and earnings short term, despite long-term strategic initiatives.

Catalysts

Engages in the design, manufacturing, and selling of building products for residential, commercial, and industrial markets in the United States and Canada.

• The launch of new products like TimberTech Fulton Rail, TimberTech Reliance Rail, Versatex XCEED siding, and TrimLogic is expected to expand AZEK's addressable market and meet a wider range of customer needs, potentially increasing future revenues.
  
• AZEK's investments in channel expansion and partnerships in the Western United States and Canada are anticipated to broaden their market reach, leading to potential revenue growth.
  
• The company's focus on wood conversion and product innovation is driving current success and is likely to continue bolstering revenue and margin expansion in future periods.
  
• AZEK's systematic recycling capabilities expansion, including the acquisition of a regional PVC and polyethylene recycling operation, is set to lower input costs, supporting margin improvement.
  
• AZEK plans to sustain and expand margins through continuous improvement programs, recycling initiatives, and sourcing savings, which should positively influence net margins and earnings.

AZEK Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AZEK's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.8% today to 13.2% in 3 years time.
• Analysts expect earnings to reach $242.4 million (and earnings per share of $1.61) by about April 2028, up from $146.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.8x on those 2028 earnings, down from 47.6x today. This future PE is greater than the current PE for the US Building industry at 20.4x.
• Analysts expect the number of shares outstanding to decline by 1.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.79%, as per the Simply Wall St company report.

AZEK Future Earnings Per Share Growth

Risks

• Market uncertainty, particularly in the broader housing and repair and remodel markets, could impact AZEK's ability to achieve its revenue targets despite positive demand signals. This uncertainty could lead to fluctuations in sales and revenue predictions.
  
• Start-up investments for new product lines and expansion into new channels are expected to continue, which could modestly impact near-term margins. This could affect net margins in the short term, before any new revenue from these investments materializes.
  
• The potential impact of planned underutilization due to new product facilities could pressure first and second-quarter margins before utilization normalizes, affecting earnings in the short term.
  
• Headwinds from weak demand in the Commercial segment, particularly Scranton Products, combined with increased material input costs, are expected to continue impacting segment margins until corrective pricing and cost actions take effect later in the fiscal year, which could suppress overall earnings growth.
  
• AZEK's focus on internal recycling capabilities involves significant upfront costs, including the recent acquisition in Indiana. While this could lead to long-term cost savings, the immediate financial impact involves significant capital allocation, potentially affecting free cash flows and earnings in the short to medium term.

Valuation

• The analysts have a consensus price target of $55.827 for AZEK based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $64.0, and the most bearish reporting a price target of just $41.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $242.4 million, and it would be trading on a PE ratio of 39.8x, assuming you use a discount rate of 7.8%.
• Given the current share price of $48.45, the analyst price target of $55.83 is 13.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.