Investment In Aluminum Coatings Will Harness Beverage Industry’s Shift From Plastics

Key Takeaways

• Expanding aluminum facilities and strategic acquisitions position AZZ for enhanced revenue through new products and organic growth.
  
• Improved cash flow and operational efficiency boost financial stability and support long-term growth in infrastructure sectors.
  
• AZZ faces macroeconomic risks, competition, and acquisition challenges, potentially impacting revenue, market share, and financial strategy.

Catalysts

Provides hot-dip galvanizing and coil coating solutions in North America.

• AZZ is investing in new aluminum coatings facilities to leverage the trend of plastics to aluminum conversion in the beverage industry, expected to enhance revenue through new product offerings.
  
• The company is committed to organic growth and is actively maintaining a pipeline of strategic bolt-on acquisitions, which could drive future revenue growth.
  
• AZZ has successfully increased cash flow from operations, allowing for substantial debt repayment, which can lead to lower interest expenses and higher net earnings.
  
• AZZ benefits from a robust organic growth trend in infrastructure spending related to highways, bridges, and energy transitions, supporting long-term revenue growth.
  
• Improvements in operational efficiency, particularly in zinc productivity and operational performance, are expected to sustain and potentially increase EBITDA margins in the future.

AZZ Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AZZ's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 14.4% in 3 years time.
• Analysts expect earnings to reach $267.9 million (and earnings per share of $8.61) by about January 2028, up from $46.5 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 14.6x on those 2028 earnings, down from 56.5x today. This future PE is lower than the current PE for the US Building industry at 20.9x.
• Analysts expect the number of shares outstanding to grow by 1.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.07%, as per the Simply Wall St company report.

AZZ Future Earnings Per Share Growth

Risks

• AZZ faces exposure to macroeconomic risks, such as fluctuating interest rates and potential impacts from tariffs, which can cause project delays and affect revenue timing.
  
• The company's business largely depends on infrastructure projects, which are subject to long approval processes and potential regulatory hurdles, affecting revenue streams.
  
• Competition with major players like Valmont and Hill & Smith in metal coatings and small players in the paint industry might affect AZZ's ability to maintain or grow its market share and thus impact its revenue.
  
• Increased administrative costs in the third quarter, due to severance and legal accruals, might hint at potential risks in managing SG&A expenses, affecting net margins.
  
• While planning for bolt-on acquisitions, integration risks and the associated capital expenditure requirements may challenge AZZ’s free cash flow and leverage strategy.

Valuation

• The analysts have a consensus price target of $99.67 for AZZ 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 $110.0, and the most bearish reporting a price target of just $90.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $267.9 million, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $87.89, the analyst's price target of $99.67 is 11.8% 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.