Trend-following is one of the most basic and widely used technical trading strategies because it works. AZZ Inc. (NYSE: AZZ) sends a signal to trend-following investors: a solid, sizeable green candle confirming support at a critical level that coincides with a long-term moving average.
The signal on AZZ’s chart is compounded by increased volume and coincident signals in the MACD and stochastic indicators, which suggest a significant shift in market dynamics. With stochastic at the low end of its range, showing support coincident with the price action, and MACD rolling into a bullish crossover, this market could quickly move back to the top of its trading range, but a more significant move is in play.
Results and analysts' sentiments drive the more significant move. The analysts' activity in AZZ is light but bullish, with four ratings tracked by MarketBeat.com. This year's trend is upgrades and price target increases, with sentiment rising to Buy from Moderate Buy. The price target is almost double compared to last year. The critical detail is that the analyst's lowest target corresponds to the high end of the existing stock price trading range, suggesting a deep value opportunity and a new all-time high is likely.
Industrial Services AZZ Inc. Generates Cash, Improves Balance Sheet
AZZ Inc. is an industrial services company specializing in metal coatings, galvanizing, and corrosion protection. Its business is supported by public and private spending, global infrastructure projects, the oilfield upcycle, and the renewable industry, which combined to drive record quarterly results in FQ1.
The top-line $413.21 million in revenue is up 5.7% compared to last year and outpaced the consensus estimate by nearly 300 basis points on strength in both operating segments. The smaller metal coatings segment grew by 4.7%, led by a 6.5% gain in the larger Precoat Metals segment, and both contributed to a wider margin.
The company’s EBITDA margin improved by 100 basis points to leverage top-line strength into accelerated earnings growth. The GAAP results look bad despite the margin improvement because of debt reduction. The company used its considerable free cash flow (and capital raised from a share offering) to pay down debt and redeem Series A preferred shares.
The dilution is a minor concern but is offset by the improving capital structure and balance sheet. Those improvements will help the company build long-term shareholder value over time. The takeaway is that adjusted earnings grew by 28%, outpaced the consensus by 1450 basis points, allowed substantial balance sheet improvement, and the guidance is favorable.
The company reiterated its guidance for 2025, which assumes revenue is flat to up 5% compared to 2024 with a wider margin. Earnings are expected to grow by 10% and support additional balance sheet improvement and capital return. Capital return is primarily a dividend worth $0.68 or about 0.9% in yield with shares near $80. The payout is reliable at 15% of the relatively unimpeded earnings now that the Series A shares are redeemed. There is still some debt, but the 2.8x leverage ratio is low and expected to fall further.
A Tailwind for AZZ Inc.
The June CPI data strengthened a tailwind for AZZ and other business services stocks. The data was cooler than expected and aligns with the outlook for two interest rate cuts this year. Lower rates will trigger earnings growth, if not accelerate top-line growth, because the cost of money will fall. Public and private spending can increase in this environment, driving demand for AZZ services and products.
