On Tuesday, Azek Co. (NYSE: AZEK), a company specializing in composite decking and outdoor living products, received a downgrade in its stock rating from BMO Capital. The firm shifted its stance from Outperform to Market Perform and adjusted the price target to $50 from the previous $53.
The downgrade comes as recent market assessments indicate a deceleration in the demand growth for composite decking, which had seen a robust pace in the first quarter.
Distributors and dealers currently have ample stock, leading to concerns about the demand in the second half of the year. The revised outlook reflects a more cautious perspective on the company's stock, considering the balanced risk/reward at the current price levels.
BMO Capital's revised price target of $50 is based on a 20.0x multiple of their forecasted FY25 earnings before interest, taxes, depreciation, and amortization (EBITDA) for Azek.
Despite the downgrade, the firm acknowledges Azek's potential for long-term structural growth driven by the ongoing material conversion to composites and the company's capacity for margin expansion.
The analyst's statement highlighted the rationale behind the downgrade, pointing to the well-stocked nature of distributors and dealers and the uncertainty surrounding the demand for the latter half of the year. This change in rating suggests a more neutral outlook on Azek's near-term performance in the market.
Azek Co., known for its innovations in the outdoor living space, remains recognized for its growth potential in the longer term. The company's focus on converting traditional materials to composite solutions is expected to continue to be a key driver of its expansion.
In other recent news, Loop Capital and Baird have adjusted their financial outlooks for Azek Co., citing a mix of positive performance indicators and cautious market expectations. Despite the reductions in price targets, both firms maintain a positive outlook on Azek's operational performance.
The firms recognize Azek's continued market share gains and margin growth, fueled by successful recycling efforts and productivity improvements. However, they have slightly tempered revenue projections due to potential impacts of high interest rates and a dip in consumer sentiment on bidding activities.
In addition, Azek has reported an 11% increase in consolidated net sales to $418 million for the second quarter of fiscal year 2024, leading to an increase in its full-year sales and adjusted EBITDA guidance. The company also authorized a new stock repurchase program, allowing the buyback of up to $600 million of its Class A common stock.
Azek has received a non-compliance notice from the New York Stock Exchange due to a delay in filing its quarterly financial report. Despite this, analysts view the company's recent accounting misstatement as resolved and isolated, with core demand and margin trends remaining favorable. These are recent developments for Azek Co.
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