Small-cap industrial services company AZZ Inc. (NYSE: AZZ) stock rose more than 100% between 2023 and 2024 and can rise another 25% or more over the next year. The rise in share prices is driven by improving business, cash flow, debt reduction, and capital return, which are expected to continue.

The results from Q2 were stronger than expected, including improved guidance for revenue and earnings and an accelerated outlook for debt reduction. Regarding the business, AZZ Inc. provides metal coatings services for various end markets and is critical to industries across verticals. Its services extend the lifespan of metal components, helping to control replacement costs and downtime. 

Diversified Business and Improved Demand Drive Results for AZZ Inc.

AZZ Inc. did not grow robustly in FQ2 but sustained growth in the low single digits above the consensus forecast reported by MarketBeat.com. The $409.01 million reported is up 2.6%, edging past the consensus by a narrow margin on strengths in construction, transportation, and utilities end markets offset by industrial, consumer, and “other” end markets. Demand is cited as the #1 growth driver, with prices holding steady in the quarter. Segmentally, Metal Coatings grew by 1% and Precoat Metals by 3.8%.

Margin news is good at all levels. The gross margin expanded by 90 basis points, and SG&A costs declined, leaving the operating margin up 120 basis points to 16.5%, which is expected to remain strong in the current quarter. The net result is a net margin gain of 230 basis points, including the impact of debt reduction and a 28% increase in net income. The bottom line is that GAAP EPS is up 21.6% to $1.18, including the impact of dilution, which is the only negative in the report. 

Guidance is favorable, including improved expectations for revenue and earnings. The new target ranges have midpoints above the consensus and, given the trends, may be increased later in the year. The company expects pricing to remain stable. Demand is strong, and strength in the precoat segment suggests sustained growth for the metal coating segment lies ahead. 

AZZ Dilutes Stock, Pays Down Debt, and Increases Shareholder Equity

AZZ diluted its value with share sales in Q2, but the funds used favor shareholders. The funds, including cash on hand, were used to redeem the preferred stock and reduce the company’s debt load. The net result is that this positive cash flow company reported a negative cash flow quarter, leaving its cash balance down. Still, assets were up, debt and liability down, and equity improved by double digits, which is a critical factor.

Among the details in the earnings report is an acceleration of debt reduction with a target of 30% higher than the previous, accelerating the outlook for equity gains and the resumption of share repurchases. 

Analysts and institutions support AZZ Inc. stock price action. The analysts tracked by MarketBeat peg the industrial stock at a Moderate Buy and view it as a deep value, trading more than 15% below their lowest price target. Institutional activity echoes the sentiment, with institutions owning more than 90% of the company, buying on balance for five of the last six quarters, and activity spiking in Q3. 

AZZ Dips: Investors Are Seizing the Opportunity

AZZ Inc. stock price action dipped following the Q2 release, falling to the long-term 150-day EMA where support was shown. The action aligns with a trend-following entry signal and will likely result in a rebound soon. The question is if the market will take the price above critical resistance at the top of the seven-month range. If so, this market can continue rising and easily reenter the analysts' target range. The 15% low-end is the minimum target in that scenario; there is potential for a 25% gain at the consensus and 35% at the high-end range.