Operational Efficiencies And Strategic Expansion Drive Exciting Growth Across Construction And Coatings Markets

Key Takeaways

• Organic growth in Metal Coatings and Precoat Metal segments is driven by increased steel and coil coating volume, boosting revenue.
  
• Focus on operational efficiencies boosts margins and net earnings; debt management strategies improve financial health.
  
• Organic growth limits revenue expansion, posing risks from private spending slowdowns, interest rates, seasonal impacts, and execution challenges at new facilities.

Catalysts

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

• AZZ is experiencing organic growth in its Metal Coatings and Precoat Metal segments due to volume increases, particularly from higher steel and coil coating tonnage, which is likely to positively impact revenue.
  
• Continued strength in construction-related markets driven by infrastructure projects, such as bridges, highways, and renewables, is expected to bolster AZZ's revenue growth.
  
• The new aluminum coil coating facility in Washington, Missouri, anticipated to be operational by early fiscal year 2026, is expected to expand capacity and drive future revenue, underpinned by a long-term contract securing %75 of the site's capacity.
  
• AZZ is focused on operational efficiencies and productivity improvements, leading to enhanced margins as evidenced by strong EBITDA margins in the current fiscal year; this is expected to support improvements in net margins going forward.
  
• The combination of paying down debt and lowering interest costs through debt repricing is expected to improve AZZ's net earnings, given lower interest expenses affecting the bottom line favorably.

Assumptions

• Analysts are assuming AZZ's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 22.2% in 3 years time.
• Analysts expect earnings to reach $408.3 million (and earnings per share of $13.21) by about October 2027, up from $36.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.9x on those 2027 earnings, down from 65.5x today. This future PE is lower than the current PE for the US Building industry at 23.8x.
• Analysts expect the number of shares outstanding to grow by 1.14% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.98%, as per the Simply Wall St company report.

Risks

• The company's growth has been entirely organic, and any future inorganic growth through acquisitions is uncertain and dependent on market conditions and timing, which could limit revenue expansion if suitable targets are not identified.
  
• Private sector spending has slowed, and the company remains cautious about the balance of public versus private spending, which could impact revenue in the industrial and consumer markets if this trend continues.
  
• There is a potential risk related to interest rate fluctuations, and despite recent repricing efforts, any future rate hikes could increase financial costs and affect net margins.
  
• Seasonal factors and weather events could result in a slowdown in construction activity during the second half of the fiscal year, impacting overall earnings and margins.
  
• Execution risks exist in ramping up new facilities, particularly the aluminum coil coating facility in Washington, Missouri. Delays or operational challenges could affect the anticipated increase in revenue and margins.

Valuation

• The analysts have a consensus price target of $95.67 for AZZ based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.8 billion, earnings will come to $408.3 million, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 8.0%.
• Given the current share price of $79.35, the analyst's price target of $95.67 is 17.1% 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.