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Bear of the Day: AZEK (AZEK)

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AZEK (AZEK - Free Report) is a Zacks Rank #5 (Strong Sell) that engages in designing, manufacturing, and selling building products for residential, commercial, and industrial markets in the United States. AZEK’s main focus is outdoor living products, like decking, railing and trim.

As the housing market heated up after COVID, so did the stock. However, with the equity markets moving lower and mortgage rates moving higher, it means less cash for those outdoor projects at home.

The stock is well off its highs, but with earnings estimates still heading lower, investors might want to stay away until we see a turn around in earnings.

About the Company

AZEK is headquartered in Chicago, Illinois. The company was incorporated in 2013 and employs over 2,000 people.

In addition to decks for residential houses, AZEK has a commercial segment. This part of the business manufactures engineered polymer materials that is used in various industries, which includes outdoor, graphic displays and signage, educational, and recreational markets, as well as the food processing and chemical industries.

AZEK is valued at $2.7 billion and has a Forward PE of 16. The stock holds a Zacks Style Score of “D in Value, “D” in Growth and “F” in Momentum. The stock pays out no dividend.

Q1 Earnings

The company reported EPS back in early May, seeing a 6% beat on EPS. Revenues came in above expectations at $396.3M v the $369M expected. The company also raised their FY22 revenue guidance and EBITDA.

This was eight straight beat and the company has never missed since becoming public. While having a history of beating expectations are great, the market is clearly worried this won’t continue. Analysts have been lowering estimates for the company all year. 

Estimates

After earnings, analysts were positive on demand, but negative on margins and cost headwinds. Inflationary pressures will eat into the bottom line and for that reason, earnings estimates are going lower.

For the current quarter, estimates have fallen from $0.32 to 0.27, or 10% over the last 60 days. For the current year, the numbers have dropped 8%, from $1.18 to $1.08.

Technical Take

The stock debuted right after the COVID bottoms and almost doubled from the IPO price. However, since the beginning of 2022, the stock has dropped like a rock, down over 60%.

With such little chart history, its hard to tell where the bottom is. Until there is relief in the earnings estimates, the stock will likely continue to bleed lower.

If there is a positive catalyst, investors should watch the 50-day moving average. If price got over the area, which is currently at $20, there could finally be a move higher in the name.

If the stock did happen to bounce, it would likely be a selling opportunity unless inflationary pressure abates.

In Summary

With mortgage rates going higher and equity markets going lower, there is less money for AZEK’s services. While demand is still healthy, this trend might not continue if the economy worsens. Additionally, cost pressures will eat into margins, putting a squeeze on the bottom line.

These are two factors that are giving the bears fuel to sell the stock lower.

For now, a better option in the sector might be Comfort Systems (FIX). The stock is a Zacks Rank #2 (Buy) and has held up relatively well over the last six months.     


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