AZEK (AZEK)

Outdoor living products manufacturer AZEK Company (NYSE:AZEK) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 8.1% year on year to $452.2 million. On the other hand, the company’s full-year revenue guidance of $1.54 billion at the midpoint came in 0.9% below analysts’ estimates. Its non-GAAP profit of $0.45 per share was 2.9% above analysts’ consensus estimates.

Company Overview

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

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.

Competitors offering outdoor building materials include Trex (NYSE:TREX), and private companies Fiberon and CertainTeed.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, AZEK’s sales grew at an excellent 12.4% compounded annual growth rate over the last five years. Its growth surpassed the average industrials company and shows its offerings resonate with customers, a great 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 annualized revenue growth of 8.4% over the last two years is below its five-year trend, but we still think the results were respectable.

This quarter, AZEK reported year-on-year revenue growth of 8.1%, and its $452.2 million of revenue exceeded Wall Street’s estimates by 1.9%.

Looking ahead, sell-side analysts expect revenue to grow 4.9% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will see some demand headwinds. At least the company is tracking well in other measures of financial health.

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

AZEK’s gross margin is good compared to other industrials businesses and signals it sells differentiated products, not commodities. As you can see below, it averaged an impressive 33.5% gross margin over the last five years. Said differently, AZEK paid its suppliers $66.53 for every $100 in revenue.

AZEK’s gross profit margin came in at 37.1% this quarter, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

AZEK has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 9.9%, higher than the broader industrials sector.

Analyzing the trend in its profitability, AZEK’s operating margin rose by 15.1 percentage points over the last five years, as its sales growth gave it immense operating leverage.

In Q1, AZEK generated an operating profit margin of 17.6%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

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 an astounding 17.9% compounded annual growth rate over the last five years, higher than its 12.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into AZEK’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, AZEK’s operating margin was flat this quarter but expanded by 15.1 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 shorter period to see if we are missing a change in the business.

For AZEK, its two-year annual EPS growth of 57.3% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q1, AZEK reported EPS at $0.45, up from $0.39 in the same quarter last year. This print beat analysts’ estimates by 2.9%. Over the next 12 months, Wall Street expects AZEK’s full-year EPS of $1.33 to grow 15.1%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

AZEK has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.5% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that AZEK’s margin expanded by 8.8 percentage points during that time. This is encouraging because it gives the company more optionality.

AZEK broke even from a free cash flow perspective in Q1. This result was good as its margin was 8.3 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although AZEK has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.8%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. AZEK’s ROIC has increased over the last few years. its rising ROIC is a good sign and could suggest its competitive advantage or profitable growth opportunities are expanding.

AZEK reported $146.7 million of cash and $432.4 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $399.5 million of EBITDA over the last 12 months, we view AZEK’s 0.7× net-debt-to-EBITDA ratio as safe. We also see its $23.97 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing AZEK beat analysts’ revenue expectations this quarter. We were also happy its EBITDA outperformed Wall Street’s estimates. On the other hand, its full-year EBITDA guidance slightly missed and its full-year revenue guidance fell slightly short of Wall Street’s estimates. Zooming out, we think this was a decent quarter featuring some areas of strength but also some blemishes. The stock remained flat at $49.63 immediately following the results.

Updated: May 21, 2025 at 11:07 PM EDT

Before deciding whether to buy AZEK or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

There are multiple reasons why we think AZEK is an amazing business. For starters, its revenue growth was impressive over the last five years. And while its relatively low ROIC suggests management has struggled to find compelling investment opportunities, its rising cash profitability gives it more optionality. Additionally, AZEK’s expanding operating margin shows the business has become more efficient.

AZEK’s P/E ratio based on the next 12 months is 32.6x. Looking across the spectrum of industrials companies today, AZEK’s fundamentals shine bright. We like the stock at this price.

Wall Street analysts have a consensus one-year price target of $53.91 on the company (compared to the current share price of $49.87), implying they see 8.1% upside in buying AZEK in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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