AZEK’s (NYSE:AZEK) Q4: Beats On Revenue But Quarterly Revenue Guidance Misses Expectations

Outdoor living products manufacturer AZEK Company (NYSE:AZEK) announced better-than-expected revenue in Q4 CY2024, with sales up 18.7% year on year to $285.4 million. On the other hand, next quarter’s revenue guidance of $427 million was less impressive, coming in 3.1% below analysts’ estimates. Its non-GAAP profit of $0.17 per share was 24.7% above analysts’ consensus estimates.

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Results of Operations”Post this CEO COMMENTS

Company Overview

With a significant portion of its products made from recycled materials, AZEK (NYSE:AZEK) designs and manufactures goods for outdoor living spaces.

Building Materials

Traditionally, building materials companies have built competitive advantages with economies of scale, brand recognition, and strong relationships with builders and contractors. More recently, advances to address labor availability and job site productivity have spurred innovation. Additionally, companies in the space that can produce more energy-efficient materials have opportunities to take share. However, these companies are at the whim of construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of building materials companies.

Sales Growth

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, AZEK grew its sales at an excellent 12.6% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers, a helpful starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. AZEK’s recent history shows its demand slowed significantly as its annualized revenue growth of 6.4% over the last two years is well below its five-year trend.

This quarter, AZEK reported year-on-year revenue growth of 18.7%, and its $285.4 million of revenue exceeded Wall Street’s estimates by 7.9%. Company management is currently guiding for a 2.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.5% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

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Adjusted Operating Margin

AZEK has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 9.4%, higher than the broader industrials sector.

Analyzing the trend in its profitability, AZEK’s operating margin rose by 16.2 percentage points over the last five years, as its sales growth gave it immense operating leverage.

In Q4, AZEK generated an operating profit margin of 9.5%, up 4.9 percentage points year on year. The increase was encouraging, and since its gross margin actually decreased, we can assume it was recently more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

AZEK’s EPS grew at a spectacular 16.7% compounded annual growth rate over the last five years, higher than its 12.6% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into AZEK’s earnings to better understand the drivers of its performance. As we mentioned earlier, AZEK’s operating margin expanded by 16.2 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For AZEK, its two-year annual EPS growth of 41.1% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q4, AZEK reported EPS at $0.17, up from $0.10 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects AZEK’s full-year EPS of $1.27 to grow 14.7%.

Key Takeaways from AZEK’s Q4 Results

We were impressed by how significantly AZEK blew past analysts’ revenue and EBITDA expectations this quarter. The company raised its full-year revenue guidance slightly, which is usually a good sign of healthy demand. The stock traded up 1.4% to $51 immediately following the results.

Indeed, AZEK had a rock-solid quarterly earnings result, but is this stock a good investment here? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.