AZZ Inc (NYSE:AZZ) Rises After Mixed Quarter

AZZ Inc Results Driven By Strategy Shift

Shares of AZZ Inc (NYSE:AZZ) are rising after the company reported a mixed quarter. While revenue fell short of the consensus the EPS beat proving a strategic shift is not only working but helping the company to leverage earnings. Regarding the outlook, the outlook for revenue growth over the next year is robust. With earnings leverage in the picture, the 18X forward earnings the stock is trading near is not only a value compared to the broad market but too high and provides an opportunity in this value-creating investment.

“As we previously communicated during the quarter, due to shifting industry and customer dynamics, and the protracted impact from the COVID-19 pandemic, we are taking the necessary steps to strategically restructure our portfolio of businesses to become a focused metal coatings business,” says CEO Tom Ferguson.

Sales Fall But AZZ Inc Is Profitable And Generating Free Cash Flow

Sales at AZZ Inc were a mixed picture in the fiscal 3rd quarter. The company reported $226.6 million in net consolidated revenue which is down -22.2% from last year but up from the previous quarter. The downside is the YOY revenue loss accelerated, the upside is that revenue grew 11.4% sequentially and is expected to continue rising sequentially throughout calendar 2021.

On a segment basis, the Metal Coatings segment brought in $115.6 million in revenue or down about 2.0% from the previous quarter and -10.5% from the previous year. The infrastructure segment saw a 28.6% increase in sequential revenue but sales are still down more than 30% on a YOY basis.

In terms of margin and contribution to the bottom line the Coatings segments saw its margins rise 370 basis points while Infrastructure Solutions margin contracted by 290. Margin improvement is expected to accelerate in the coatings segment following the acquisition of Acme Galvanizing. Moving down to the bottom line, the net margin improvement resultes in GAAP eps of $0.76 that beat by $0.08 while the adjusted $0.80 beat by $0.12.

AZZ Inc Returns Capital To Shareholders

AZZ Inc is not a high-yielding stock but it is a solid dividend payer with ample free-cash-flow and a history of buying back shares. At current share prices, the stock is yielding about 1.4% with a payout ratio in the low 30% range, very little debt, and extremely low leverage of FCF. The company has some distribution increases in the payout history but nothing to make me think one is on the way. What Investors should expect is for buybacks to continue in the amount of $100 million

“The strong cash flow generated by our operations will continue to help the Company manage both debt and liquidity effectively throughout the remainder of fiscal 2021, and well beyond. We continue to be prudent with our use of cash by focusing capital expenditures on core growth initiatives and safety-related spending, reducing debt, and repurchasing shares to enhance shareholder value,” continued Mr. Ferguson.

The Technical Outlook: A Reversal Continues

Price action in AZZ Inc hit a bottom early in 2020 and have since rebound strongly. The purchase of Acme Galvanizing helped spur the stock to new highs just a week ago and it looks like more new highs are on the way. The indicators are a bit mixed but generally bullish and set up to fire another entry signal when prices move higher. In the near-term, there is resistance at the $51 to be wary of. Longer-term, a move to new highs or a bounce from the short-term 30-day EMA would constitute a technical entry signal for this reversal story in-progress.