Merger And Recycling Investments Will Expand Future Prospects

Key Takeaways

• AZEK's merger with James Hardie and new product launches will enhance growth, market penetration, and positively impact revenue and earnings.
  
• Recycling investments and channel expansion indicate potential for margin expansion, reduced costs, and increased sales despite economic uncertainties.
  
• Integration risks and macroeconomic uncertainties could impact AZEK's revenue growth and margins, with additional pressure from tariffs and weakened commercial demand.

Catalysts

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

• AZEK's proposed merger with James Hardie is expected to enhance material conversion efforts, provide expanded solutions for contractors, and unlock $125 million in cost synergies and $500 million in sales synergies, which should accelerate growth and positively impact revenue and earnings.
  
• The expansion and success of new product launches, such as TimberTech Harvest+ decking and TimberTech Reliance Rail, along with feedback from contractors, indicate increased market penetration that is likely to drive revenue growth.
  
• Investments in recycling capabilities and the acquisition of Northwest Polymers are set to expand AZEK's in-house capacity to source and process recycled materials, supporting long-term margin expansion and reducing input costs.
  
• Channel expansion efforts, supported by merchandise investments and display improvements, have resulted in solid shelf presence gains, indicating potential for increased sales and revenue growth.
  
• The strong demand and sell-through in residential segments and maintained conservative channel inventory positioning are expected to sustain and potentially increase margins and adjusted EBITDA, even in uncertain macroeconomic environments.

AZEK Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AZEK's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.8% today to 13.0% in 3 years time.
• Analysts expect earnings to reach $238.1 million (and earnings per share of $1.61) by about May 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 39.2x on those 2028 earnings, down from 48.8x today. This future PE is greater than the current PE for the US Building industry at 19.9x.
• 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 7.67%, as per the Simply Wall St company report.

AZEK Future Earnings Per Share Growth

Risks

• The proposed merger with James Hardie may introduce integration risks and potential disruptions in synergy realization, possibly impacting EBITDA growth and net margins.
  
• Concerns about macroeconomic uncertainties expressed by contractors and dealers could weigh on future customer behavior, potentially affecting residential sell-through and revenue growth.
  
• The acquisition-related expenses due to the merger could increase GAAP SG&A costs, thereby impacting the net income and earnings per share.
  
• The tariffs on internationally sourced materials, despite being limited, might contribute to some modest inflation, influencing gross margins if not fully offset by pricing adjustments.
  
• Weaker demand in the commercial segment, specifically the Scranton Products business, along with increases in material input costs, might continue to pressure segment profitability and affect overall revenue.

Valuation

• The analysts have a consensus price target of $54.107 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 $61.0, and the most bearish reporting a price target of just $48.0.
  
• 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 $238.1 million, and it would be trading on a PE ratio of 39.2x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $49.63, the analyst price target of $54.11 is 8.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.