AZEK's Strength In Residential Business To Outpace Market Growth Amid Recycling Initiatives, Analyst Says

Stephens analyst Noah Merkousko reiterated the Overweight rating on The AZEK Company Inc. AZEK, raising the price target to $40 from $32.

AZEK recently reported Q3 results, where the company raised the fiscal year 2023 adjusted EBITDA outlook range to $275 million-$280 million.

AZEK reported impressive results that were ahead of estimates and the 3Q23 guide, driven by an acceleration in residential sell-through, which was up double digits Y/Y, the analyst notes. 

Margins saw significant expansion from input cost deflation, more normalized production, and cost savings initiatives which are expected to continue, Merkousko adds.

The commercial segment faced continued demand headwinds, but channel destocking is expected to be substantially complete by fiscal year-end, mentions the analyst.

The analyst applauds the company's impressive performance in the residential business as AZEK continues to execute on-shelf space wins and new product roll-outs, significantly outpacing market growth.

Merkousko is increasingly confident in the long-term earnings power and the company's ability to reach its FY27 target as it continues to progress on recycling initiatives.

Following Q3 results, the analyst raised Q4 net sales guidance to $365.7 million (from $334.3 million), adj. EBITDA of $93 million (from $84.8 million) and operating EPS estimate of $0.27 (from $0.24).

Merkousko raised FY23 net sales estimates to $1.347 billion (from $1.294 billion), adj. EBITDA of $277.9 million (from $257.3 million) and operating EPS of $0.66 (from $0.56). For FY23, residential sales growth is expected to be 2.5%, and Commercial top-line decline is projected to be (20%).

For FY24, the analyst sees net sales of $1.465 billion (from $1.363.1 billion), adj. EBITDA of $346.2 million (from $310 million) and operating EPS of $1.03 (from $0.88). 

Merkousko rolled out FY25 estimates. For FY25, the analyst expects net sales of $1.582 billion, adj. EBITDA of $382 million, and operating EPS of $1.21. 

Price Action: AZEK shares are trading higher by 6.43% to $33.27 on the last check Wednesday.