What happened
In a difficult environment for housing and construction stocks, Azek's (AZEK 3.02%) results held up better than expected. Shares of the recycled building products company climbed as much as 16% on Thursday on signs the company is doing a good job weathering the current cycle.
So what
Azek is a maker of decking materials, trim, and other outdoor building products using recycled plastics. The company lost money in its fiscal first quarter ended Dec. 31, but results were not as bad as analysts had feared.
Azek lost $0.09 per share on revenue of $216.3 million, compared to consensus expectations for a loss of $0.10 on revenue of $206 million. CEO Jesse Singh credited "favorable sales combined with solid operational execution" for the modest beat, and said ongoing issues with supply chains appear to have normalized.
Net sales in the quarter were down 16.7% year over year, in part due to a 33% decline in volumes related to channel inventory reductions. The company is seeing the impact of a slowing housing and home renovation market, which is being weighed down by higher interest rates, but Singh said Azek sees opportunities to grow despite market conditions.
"We have a clear strategy and Azek-specific initiatives to drive above-market growth and margin expansion," Singh said. "With traditional materials such as wood continuing to represent approximately 40% to 75% of our core markets, we are confident that we are in the early stages of market conversion and remain excited about the compelling long-term opportunities in front of Azek."
Now what
Azek sees soft demand trends continuing into 2023, with the company expecting a 10% year-over-year decline in volumes for the full year. But that is to be expected, given the trends we are seeing in housing, and Wall Street was encouraged by the company's success in managing through the environment.
Post-earnings, Barclays analyst Matthew Bouley raised his price target to $33, from $28 and kept an overweight rating on the shares, noting that the quarter broke a pattern of negative earnings revisions for the company. With that in mind, Bouley said the unchanged guidance should be viewed in a "decidedly positive light." And if the company is correct that inventories and supply chain issues have stabilized, there is the potential for upside.
There isn't much Azek can do to counter the impact of rising rates on housing and renovation demand, but the company appears well positioned for when the cycle turns. Given what Azek has accomplished, investors appear content to wait out the cycle holding the shares.
