Outdoor living products manufacturer AZEK Company (NYSE:AZEK) announced better-than-expected results in Q2 CY2024, with revenue up 12.1% year on year to $434.4 million. On the other hand, next quarter's revenue guidance of $337 million was less impressive, coming in 10.1% below analysts' estimates. It made a non-GAAP profit of $0.42 per share, improving from its profit of $0.30 per share in the same quarter last year.
Is now the time to buy AZEK? Find out by accessing our full research report, it's free.
AZEK (AZEK) Q2 CY2024 Highlights:
- Revenue: $434.4 million vs analyst estimates of $396.7 million (9.5% beat)
- EPS (non-GAAP): $0.42 vs analyst estimates of $0.36 (15.2% beat)
- Revenue Guidance for Q3 CY2024 is $337 million at the midpoint, below analyst estimates of $374.9 million
- EBITDA guidance for the full year is $375 million at the midpoint, in line with analyst expectations
- Gross Margin (GAAP): 37.8%, up from 34.1% in the same quarter last year
- EBITDA Margin: 27.5%, up from 24.9% in the same quarter last year
- Free Cash Flow of $177.5 million is up from -$34 million in the previous quarter
- Market Capitalization: $6.04 billion
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Results of Operations”Post this CEO COMMENTS
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 business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, AZEK's 14% annualized revenue growth over the last five years was exceptional. This shows it expanded quickly, a useful starting point for our analysis. 
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. AZEK's recent history shows its demand slowed significantly as its annualized revenue growth of 3% over the last two years is well below its five-year trend.
This quarter, AZEK reported robust year-on-year revenue growth of 12.1%, and its $434.4 million of revenue exceeded Wall Street's estimates by 9.5%. The company is guiding for a 13.3% year-on-year revenue decline next quarter to $337 million, a reversal from the 27.6% year-on-year increase it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 1.6% over the next 12 months, a deceleration from this quarter.
Unless you’ve been living under a rock, it should be obvious by now that generative AI is going to have a huge impact on how large corporations do business. While Nvidia and AMD are trading close to all-time highs, we prefer a lesser-known (but still profitable) semiconductor stock benefitting from the rise of AI. Click here to access our free report on our favorite semiconductor growth story.
Operating Margin
Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
AZEK has done a decent job managing its expenses over the last five years. The company has produced an average operating margin of 8.9%, higher than the broader industrials sector.
Looking at the trend in its profitability, AZEK's annual operating margin rose by 7.8 percentage points over the last five years, as its sales growth gave it immense operating leverage.
In Q2, AZEK generated an operating profit margin of 17.4%, up 2.4 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.
EPS
Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
AZEK's EPS grew at a spectacular 16.1% compounded annual growth rate over the last five years, higher than its 14% annualized revenue growth. This tells us the company became more profitable 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 7.8 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 also analyze EPS over a shorter period to see if we are missing a change in the business. For AZEK, its two-year annual EPS growth of 9.2% was lower than its five-year trend. We hope its growth can accelerate in the future.
In Q2, AZEK reported EPS at $0.42, up from $0.30 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 to grow its earnings. Analysts are projecting its EPS of $1.25 in the last year to climb by 5.6% to $1.32.
Key Takeaways from AZEK's Q2 Results
We were impressed by how significantly AZEK blew past analysts' revenue expectations this quarter. We were also excited its EPS outperformed Wall Street's estimates. Full year guidance for EBTDA came in line with expectations, show that the company is on track with its profits. On the other hand, its revenue guidance for next quarter missed. Zooming out, we think this was a mixed quarter, but the market seems more focused on the positives. The stock traded up 11.3% to $41 immediately following the results.
So should you invest in AZEK right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.