Coating Earnings With Growth: AZZ Inc.'s Mixed Quarter

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AZZ Inc. has shown strong performance, with a 92.33% stock return, driven by strategic acquisitions and operational efficiency improvements.The Precoat Metals acquisition significantly boosted AZZ's ...

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(NYSE:AZZ), which protects metal, especially steel, from corrosion. They use a hot-dip galvanizing process, coating steel with zinc to prevent rust, helping extend the lifespan of bridges and buildings. They also provide coil coating, a process in which metal sheets are cleaned, treated, and painted to create a durable finish. It's commonly used for roofing and appliances. In simple terms, AZZ makes metal stronger and more resistant to wear and tear.   AZZ annual revenues increasing (Seeking Alpha) Back then, while the company had strong results in some core areas, it ran into significant challenges, missing earnings and revenue estimates for Q1 FY 2024. But I also noticed a burst in annual revenue (from 2022), and looking back, that should have been my biggest bullish sign, but I still had concerns, especially about rising costs, high debt, and lagging behind the S&P 500 performance-wise. At the time, these factors made me give it a \"Hold\" rating. I was definitely wrong not to give it a \"Buy.\" Since then, AZZ’s stock has returned an impressive 92.33%, before factoring in this morning's post-earnings dip, far outpacing the S&P 500’s 30.47% gain. Today, I’m revisiting after AZZ’s recent Q2 2024 earnings report, which has the stock trading down 5% as of now, as I look for signs that its current growth and momentum warrant reconsidering my previous rating. AZZ's Performance   Fast Graphs Before diving into the latest results, let's quickly look at how the stock has performed in recent years. Between March 2020 and October 2024, the stock more than doubled, going from $35.29 to $81.57.   Fast Graphs This translates to an annualized return of 20.01%, beating the S&P 500’s 15.52% over the same period.   Fast Graphs What’s noticeable is the unchanged dividend. Since 2021, AZZ’s dividend has stayed at $0.68 per share. This may disappoint income-focused investors, especially when compared to the S&P's 4.32% annual dividend growth. AZZ's Q2 2025 Highlights AZZ Inc.'s second-quarter results for fiscal year 2025 delivered a few notable highlights. Total sales climbed 2.6%, reaching $409 million, up from $398.5 million in the same quarter last year. Precoat Metals drove that growth, with a 3.8% increase in sales to $237.5 million, showing real strength in key markets like construction and HVAC. AZZ's Strategic Acquisition Precoat Metals is a key player in the metal coil coating industry, specializing in coating steel and aluminum. AZZ’s 2022 acquisition of Precoat Metals for about $1.28 billion expanded its presence in the North American coatings market. The deal helped AZZ broaden its product line, especially in prepainted and post-fabrication coatings, and reach more industries like construction, HVAC, appliances, and transportation. Precoat Metals operates 13 manufacturing plants across North America, coating metals with 15 coating lines and 17 processing lines. Their coil coating method cuts down on material waste and shields the environment. As the paint is applied, 98% of harmful chemicals—volatile organic compounds (VOCs)—are captured. They don’t release them into the air. They convert them into energy. It’s a cleaner, more efficient process. And compared to traditional painting, which creates more waste, Precoat’s approach offers a smarter, greener solution. For AZZ, the acquisition added value from day one, bringing in over $700 million in annual revenue and cementing the company's role as a top galvanizing and coil coating provider in North America. This shift, backed by the Precoat Metals acquisition, didn’t just expand AZZ’s market reach; it boosted their financials in the second quarter. Net income jumped 25% to $35.4 million, and adjusted net income climbed 11% to $41.3 million. Earnings per share followed suit, with GAAP EPS up 21.6% to $1.18 per share, and adjusted EPS rising 7.9% to $1.37. Operational efficiency stayed strong, with adjusted EBITDA hitting $91.9 million, making up 22.5% of sales, up slightly from last year’s 22.1%. Strong Margin Performance Metal Coatings reported an adjusted EBITDA margin of 31.7%, up 130 basis points, while Precoat Metals reached 21.1%, up 80 basis points. Operational improvements, like more efficient zinc use in Metal Coatings and a better product mix at Precoat Metals, boosted these margins. Effective Debt Management AZZ also demonstrated strong debt management, cutting debt by $20 million in Q2 and $45 million year-to-date, lowering its net leverage ratio to 2.7x. Cash flow from operations reached $119.4 million for the first half of the year, prompting the company to raise its debt reduction target to at least $100 million, up from the original $60-90 million. The company boosted its cost efficiency by repricing Term Loan B, cutting its borrowing rate by 75 basis points to SOFR+2.50%. AZZ kept up shareholder returns with a $0.17 per share cash dividend. Looking ahead, the company updated its FY2025 outlook, expecting sales between $1.525 billion and $1.625 billion, adjusted EBITDA in the range of $320 million to $360 million, and adjusted diluted EPS of $4.70 to $5.10. AZZ' Valuation   Fast Graphs With a blended P/E ratio of 17.04x, AZZ looks reasonably priced based on earnings, though it's a bit below its usual P/E of 18.60x, which tells me that there could be some upside for those willing to buy this dip, especially with the company’s operating earnings growth rate of 6.98%. While that growth rate isn't anything flashy, it's steady, which is exactly what you want to see in a cyclical sector like building products, where stability often wins over time. And on the income side again, we see from a different angle here that AZZ’s dividend yield is 0.83%, which is pretty low. Debt is always something I keep an eye on, so while the company seems to have a firm grip on it, I just wanted to point out that its long-term debt-to-capital ratio is 47.72%, so they’re fairly leveraged. Risks & Headwinds Before we bring this to a wrap, there were a few red flags in the results. Precoat Metals saw solid growth, but Metal Coatings' sales only ticked up by 1%, signaling slower progress in that area. Interest expenses stayed a heavy load, hitting $21.9 million this quarter—down from $27.8 million last year but still a big number. On top of that, capital spending was pretty steep at $32.1 million in Q2, with $19.4 million going towards the company’s 250,000-square-foot plant in Washington, Missouri, set to be up and running by 2025. For the year, they expect capital expenditures to land between $100 million and $120 million, which could squeeze cash flow a bit. On top of that, liquidity tightened up a bit, with cash dropping from $4.3 million at the start of the quarter to $2.1 million by the end. The company also took a hit earlier in the year when it redeemed Series A Preferred Stock, leading to a hefty $75.2 million redemption premium that cut into net income for common shareholders over the first six months. Final Takeaway  I'm still keeping my rating of AZZ as a \"Hold\": they’ve got some positives—revenue is up, margins are better, and they’re chipping away at their debt—but the rising interest costs and heavy capital spending are worth watching. That Precoat Metals acquisition was smart, but right now, I’d sit tight and see how things play out before jumping in. 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