Wednesday, May 10, 2017

A current AIM holding: AZZ Inc. (AZZ) by Max Mattappillil. “All That AZZ - 2018 Looking Good."

AZZ Inc. (AZZ, $59.05): “A Bright 2018 May Be On The Way”
By: Max Mattappillil, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

AZZ, Inc. (NYSE:AZZ) is a global provider of galvanizing, welding solutions, specialty electrical equipment, and highly engineered services. AZZ provides support to the power generation, transmission, and industrial markets.

• Fiscal 2017 was AZZ’s year as a financial punching bag.

• Acquisitions of PEI Enclose and Alpha Galvanizing have brought AZZ success in addition to their recent decision to retaining Nuclear Logistics.

• 2018 may require sunglasses for AZZ’s shareholders as the year looks to be bright.

Key points: AZZ experienced a very rough fiscal 2017 as their Net Sales, EPS, Gross Margins and Operating Margins all fell while their effective tax rate increased. Low oil patch activity and a rising cost of zinc reduced AZZ’s ability to expand their sales across multiple markets. Management also realized that they may have been a bit aggressive in terms of implementing too many initiatives towards business operations without a reasonable time frame to recognize returns.

However, AZZ could stay somewhat positive as their recent acquisitions of Power Electronics and Alpha Galvanizing have performed very well during fiscal 2017. Combined with AZZ’s fairly recent decision to co-manage Nuclear Logistics with Westinghouse, Azz might just return to being in the black.

AZZ remains obstinate on keeping its corporate staff tight-knit, despite the disadvantages a low-staffed team may bring. To counteract this, AZZ recently added an executive that will focus on operational improvement so that AZZ can smooth its various segments and move forward from the rough patches fiscal 2017 carried.

The petrochemical market has begun to move in favor of AZZ and its new plant for its galvanizing segment is operating with every cylinder firing, boosting AZZ into fiscal 2018. AZZ also secured a contract with Beijing Sino-American Yuli Power Technology to provide 11,500 meters of underground gas insulated line for the new Chinese power project. Establishing global momentum may be the catalyst that pushes AZZ towards a successful fiscal 2018.

What has the stock done lately?
Since AZZ released its earnings on April 20th, 2017, its share value dropped 7.3%. While this drop broke AZZ out of its month long trading range between roughly $57-$60, it spiked up 12.2% over the next five days and recently closed near the top of its previous trading range. While AZZ foresees strong growth for 2018, AZZ is still heavily influenced by the energy market and zinc prices and may return to its previous trading range once again if no significant changes occur.

Past Year Performance: AZZ reached a maximum 1 year share price of $67.67 in September 2016 only to drop down to its lowest 1 year price of $51.60 two months later. Since 2017, AZZ has remained fairly stable and traded in a range between $56 and $60, however it has recently broken out of that range from both the floor and ceiling.

 Source: FactSet

My Takeaway

AZZ had to face significant headwind against its fiscal 2017 operations and currently feels those effects as seen by a reduction in its solar business as well as low oil patch activity. However, AZZ seems to have laid out its groundwork 2018 at a granular level in order to maximize its chances of improving operations. 

AZZ recognizes where they struggled and have taken measures to turn their weaknesses into strengths. An increase in AZZ's acquisition rate and a more global focus on large projects might be the push that lets AZZ put fiscal 2017 firmly behind them.  

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