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A Tuck In Acquisition
AZZ Inc. acquired Aquilex Specialty Repair and Overhaul in late February 2013 for approximately $250 million. Aquilex services the power generation markets through maintenance, repair and revitalization services to the nuclear and fossil fuel power generation assets, as well as the refining and industrial markets. The deal led one analyst to move earnings estimates from $2.70 to $3.10, and in the second full year of ownership the company expects to see accretion of $0.50 to $0.60.
AZZ manufactures and sells electrical equipment and components for power generation, transmission and distribution, and industrial markets. The company has two segments, electrical & industrial products (EIP), and galvanizing services (GS). The EIP segment produces specialty electrical products for the distribution of electrical power to and from generators, transformers, switching devices. The GS segment provides hot dip galvanizing to the steel fabrication industry.
AZZ Beats Estimates In Three of Last Four Quarters
Dating back to the February 2012 quarter, AZZ delivered positive earnings surprises in a strong of 3 consecutive reports. The average beat was more than 10% above the Zacks Consensus Estimate. Following the beats, the stock moved higher by an average of 10% in the session following the release.
The November 2012 quarter was the most recent report was the lone miss. The company reported $0.60 when the Zacks Consensus Estimate was looking for $0.61. Wall Street didn't seem to mind much as the stock moved higher by 4.25% in the session following the earnings report.
Stockholders also get paid to hold shares of AZZ, which makes them attractive to not only growth investors, but income investors as well. The modest dividend of $0.14 per quarter yields about 1.2%, but that dividend has a way of keeping shorts off the stock and rewards the patience of longer term investors.
AZZ Sees Estimates Moving Higher
Estimates for AZZ have risen throughout 2012. The Zacks Consensus Estimate for 2013 for AZZ stood at $1.78 as of April 2012. The consensus since moved higher to $2.09 in August 2012 and now stands at $2.22. Similarly, estimates for 2014 have moved from $2.33 in June 2012 to their current level of $2.94.
One thing I like to see is a strong implied earnings growth rate, and URI has a very strong 32.4% implied rate of growth.
The valuation picture for AZZ looks really solid. On a price to earnings basis, the company trades at a slight premium to the industry average, but not by enough to scare off most investors. The trailing twelve months PE of 22x is higher than the 17x industry average, but the more important forward PE of 16x is much less of a premium to the industry average of 14x. The price to book is roughly double that of the industry average, but the company did just lever up to make that acquisition. It should be noted that the Pre-Tax Margin and the Net Margin for AZZ are almost 3x higher than the industry average.
I wanted to give a little perspective on the safety of this stock, and what better way than to show a chart of the book value per share over the last few years. The chart below is the dream line of most investors... a near 45 degree angle of slow and steady growth. This speaks to the safety of this company. This chart, provided by YCharts, can be found on the Zacks.com home page.
The next chart is one that I use very frequently when looking at the future prospects of a stock. The price and consensus chart shows how the stock reacts to changes in earnings estimates and we can see 2013 estimates were guiding the stock over the last year. The 2014 estimates are moving dramatically higher, and will soon help push the stock to more new 52 week highs.
Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.
Brian is also the editor of Follow The Money Trader a trading service that tracks institutional money flows and looks for great stock picks from that data.
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