The S&P 500 is down more than 10% year-to-date; the markets and the economy show little sign of improving and investors are searching feverishly for a few good stocks to defy gravity. That’s not an easy task when it seems everything is pointing downward. One exception in 2008 is AZZ Inc. (NYSE:AZZ).
The small cap operates two businesses:
- Electrical and Industrial Products
- Galvanizing Services
AZZ has been in business since 1956, and its achieved 21 consecutive years of profitability. If you invested $100 in the company on Feb. 28, 2003, it's now worth $619.80. This compares to $186.20 for all NYSE stocks. It isn't the most glamorous company in the world but they sure know how to make money, especially shareholders.
Can It Last?
In the last four fiscal years (those between 2004 and 2008) AZZ has grown EPS from 39 cents to $2.26 per share, increasing net margins 550 basis points to 8.6% from 3.1% in 2004. Not only has it improved profit margins, it's grown the top line 23.8% annually.
With numbers like these, it's no wonder its stock has done so well and 2008 is proving no different. It closed 2007 at $28.85 and was already up 11.9% YTD before the June 27 announcement of its huge first quarter. Since then, the stock's up more than $12 or 37%. These are excellent gains in a terrible year. Will they continue? Lets see
Business is Booming
Revenue in the first quarter ended May 31 2008, was up 33% to $100 million from $75.4 million year-over-year. Electrical product revenue grew 27%, and galvanizing services grew 39%, generating operating income increases of 25% and 55% respectively. Given the galvanizing services business is growing faster than the electrical products segment and has an operating margin almost double - 27.9% to 15.3% - combined with lower SG&A expenses, it all translates to company revenue projections in 2009 between $410 million and $425 million with EPS between $2.95 and $3.05. Even at the lower end of projections, we're talking about 30% increases for both sales and earnings. (Find out more on how earnings from operations affects stock price in Zooming in on Net Operating Income and Analyzing Operating Margins.)
Its backlog at the end of the first quarter was $141.8 million with only 19% meant for export. Two things struck me about this number: Firstly, there is clearly much room for growth outside the U.S. and secondly, it seems to be unaffected by an economic slowdown in its home market. Not many companies can make this claim.
Key Acquisitions
Lost in the good news of the earnings announcement was the acquisition of a small Canadian competitor, Blenkhorn and Sawle Ltd., for $14 million. The strategic purchase will add $20 million in revenue and be accretive to 2009 earnings. More importantly, it gains further inroads into the Canadian market. Earlier in the year, it consummated a much larger deal when it bought AAA Industries for $83 million, obtaining six galvanizing plants that produce $55 million in sales annually. In fiscal 2008, revenues split 56% to 44% in favor of the electrical products division.The two acquisitions will close the gap between them producing even greater profits thanks to the galvanizing services higher operating margins. Perhaps this is why James O'Shaughnessy's investment firm owns 5% of the stock.
On a profitability basis it compares favorably with its competition, especially return on equity, where its 21.52% is better than three of its competitors: Ametek (NYSE:AME) at 21.22%, Eaton (NYSE:ETN) at 19.92% and Regal-Beloit (NYSE:RBC) at 14.82%.
Bottom Line
AZZ is a company I won't pretend to know intimately. I much prefer consumer discretionary stocks, despite their poor performance of late. However, I can't ignore a freight train when it's on the loose. By most valuation metrics, AZZ's stock price is fair, even with the recent jump in value. But forget all of that and remember just one thing. It's made money 21 years straight. I like its chances to do it again in 2009.
For related reading on valuation, check out Operating Cash Flow: Better Than Net Income?
