Q4 FY23 Earnings Summary and ProspectsThe Azek Company’s () stock price has grown approximately 40% in the past six months, which is better than the 10% growth in the S&P 500. AZEK recently reported its fourth quarter FY23 financial results that were better than expected. The revenue in the quarter increased by 27.6% Y/Y to $388.8 mn, compared to the consensus estimate of $368.5 mn. This was primarily due to the volume growth in the Residential segment, partially offset by volume declines in the Commercial segment. The adjusted EBITDA margin improved by 630 bps Y/Y to 27.4% due to better manufacturing utilization, productivity initiatives, and material savings. This improvement benefited the bottom line of the company. The adjusted EPS in the quarter improved by $0.20 Y/Y to $0.36 (vs. the consensus estimate of $0.29).AZEK’s Residential segment, which contributes 90% of the total revenue, grew by 37.6% Y/Y in the fourth quarter of FY23. This was due to weak Y/Y comparisons and high sell-through demand, driven by material conversion, shelf space gains across pro and retail channels, and contributions from new products in Decking, Railing, and Exteriors. The Commercial segment, contributing to the remaining 10% of the revenue, saw a 22.6% Y/Y decline. Within the segment, the sales of the Vyom business decreased by 32.8% Y/Y and that of Scranton Products decreased by 11.2% Y/Y.Looking forward, the sell-through demand in the Residential segment should continue to grow in the coming quarters as the demand remains strong. Additionally, AZEK-specific initiatives such as material conversion, channel expansion, and new product development should drive further growth. In 2024, AZEK plans to launch several new products, including the new TimberTech Composite Terrain+ Collection, new TimberTech Aluminum Framing, new TimberTech Railing Horizontal Cable Infill, and new AZEK Exteriors Bevel Siding. Given the tough Y/Y comparisons, I believe the company’s sales growth in 2024 should grow in the mid-single digits.On the margins front, AZEK accelerated its productivity and material conversion initiatives in 2023, benefiting its margin improvement. AZEK simplified its business portfolio by selling its Vycom business for gross proceeds of $140 mn. Initiatives such as business simplification, productivity improvement, and material conversion should continue to benefit the company’s margins. The lower raw material costs should also flow from the balance sheet to the income statement, further improving margins.
Valuation & ConclusionBased on relative valuation, AZEK is currently trading at 40.11x forward P/E based on a consensus EPS estimate of $0.94 for FY24 and 33.11x forward P/E based on a consensus EPS estimate of $1.14, which is below the five-year average forward P/E of 40.02x. In conclusion, I believe AZEK is good buy given the healthy sales and margin growth prospects and a cheap valuationMore By This Author:
The AZEK Company: Still A Good Buy Despite The Recent Bull Run
