AZZ Inc. Does What Few Others Can Do
AZZ Inc. (NYSE: AZZ) Is fundamental to the global economy but that it's not what's so impressive about its Q3 results. The company managed to widen its margins well above expectations despite systemic headwinds and challenges that seem to be mounting for most other businesses. Not only did the company exceed expectations for earnings but it raised its guidance as well and shares are moving higher because of it. Now, with shares of the stock on the brink of setting a new multi-year high we see this market gaining strength and moving up to retest the all-time high by the end of the year. A move to the all-time high plus the safe 1.25% dividend yield would be worth 20% for investors and we think new all-time highs will be the story next year.
AZZ Is A Fundamental Play On Many Levels
AZZ Inc. is a fundamental play in the global economy for many reasons. Not only does the business engage in specialty coatings, welding, and highly engineered metal components but it also has broad exposure to infrastructure. This makes it a diversified play on industrials, global economic growth, and real assets like infrastructure which are noteworthy for their resistance to inflation. Oddly enough, Pricetargets.com analyst tracking data shows the analysts are largely ignoring this stock but that’s about to change.
So, AZZ Inc. reported $216.40 million in net consolidated revenue for a gain of 6.4% over last year. The good news is that the company saw strength in both segments with the Coatings and Welding segment up 10.7% and the Infrastructure Solutions segment up 0.6%. The bad news is that revenue is still down versus 2019 and missed the consensus estimate by 57 basis points but that's where the bad news end.
The company missed its revenue estimates by a slim 57 basis points but widened margins by an above-expectation 460 basis points. This left the operating margin at 8.1% and drove Q2 GAAP earnings of $0.76. The GAAP earnings are up 55% from last year and beat the consensus by 11% despite the weakness in revenue. Looking forward, the company is expecting the momentum to build in the third and fourth quarter and to the point of overcoming this quarter's revenue weakness. The new range for revenue guidance is up 1.15% while the guidance for earnings is up a more substantial 5.65%. The company is now expecting earnings in the range of $2.90 to $3.20 versus the previous high-end of $3.05 and the consensus estimate of $3.03.
AZZ Inc. Returns Capital To Shareholders
AZZ Inc. pays a very steady dividend that has only ever increased during its history. The payout is worth about 1.25% with shares trading at $57 and we view it as exceptionally safe. The payout ratio is a low 22% and the balance sheet is very strong. The company is net debt but has a very low 2.4X leverage ratio and ample coverage. With margins widening and earnings outpacing expectations we view the dividend as not only safe but as having a positive bias if not a positive outlook for future dividend increases. And AZZ Inc. buys back shares, too. The company repurchased $15 million worth of its shares during the quarter and can be expected to buy back more of its shares at opportune times.
The Technical Outlook: AZZ Inc. Is Moving Higher
Shares of AZZ Inc. are up more than 4% in the wake of the Q2 earnings report and look like they are moving higher. The weekly chart shows a rally and consolidation that is now followed up by a strong upward movement that we view as a continuation signal. In that light, investors might expect the stock to move up by $20 or more from the $50 level which puts the stock firmly trading at new all-time highs.
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