AZZ Inc. (AZZ 48.58, -0.09, -0.18%) dipped lower in morning trade after it reported mixed 2Q18 (Aug) earnings results this morning.
Established in 1956, AZZ is an industrials company that provides galvanizing, welding solutions, specialty electrical equipment, and highly engineered services to various infrastructure-oriented markets. The company two operating segments: Energy and Metal Coatings.
Its Energy segment is a provider of equipment, largely derived from raw materials like copper, aluminum, steel, and nickel-based alloys, used for industrial, nuclear, and electrical applications. Product offerings available in the segment include custom switchgear, electrical enclosures, medium and high voltage bus ducts, explosion proof and hazardous duty lighting, nuclear safety-related equipment, and tubular products. In addition to products, the segment also provides services such as extension of life cycle for power generation, refining, and industrial infrastructure through automated weld overlay services for corrosion and erosion mitigation.
The Metal Coatings Segment provides hot dip galvanizing and other metal coating applications to the steel fabrication industry. Hot dip galvanizing is a metallurgical process in which molten zinc, the principal raw material used in this process, is applied to steel. The zinc alloying renders protection from corrosion to fabricated steel for extended periods of up to 50 years.
Turning to the AugQ results, EPS rose 13% year/year to $0.43 while revenue rose 13.5% year/year to $222.8 mln. While this was good growth in both metrics, these results were mixed relative to market expectations. On the positive side, AZZ raised the lower end of its full year EPS guidance to $1.90-2.25 from $1.75-2.25.
Breaking it down by segment, revenue in the Energy Segment rose 9.5% year/year to $106.5 mln. Operating margin rose to 4.0% vs 2.4% in the prior year period primarily as a result of higher gross margins on increasing sales. Metal Coatings segment revenue rose 17.4% year/year to a record $116.3 mln. However, segment operating margins dipped lower.
AZZ says it continues to build on the positive momentum in Energy segment bookings, reinforcing a solid backlog heading into Q3 (Nov), which is traditionally a seasonally strong quarter for outages and turnarounds. This sets the stage for a solid performance in the second half of the fiscal year, hence the increase in FY19 guidance.
On the Metal Coatings side, despite the lingering high cost of zinc and the labor cost headwinds in the galvanizing market, AZZ is cautiously optimistic for continued solid financial performance for FY19, believing that zinc costs should begin to recede by Q4. AZZ has taken the necessary steps to close two underperforming galvanizing plants during the year.
The stock jumped in early July on very strong MayQ results. However, the stock has been trending lower over the past month, sinking from the $54 area to the $48 area. It seems investors had some concerns heading into this report, and the stock’s early trading action seemed to indicate that some investors felt that the report had validated those concerns. Our sense is that AZZ's earnings tend to vary quite a bit from quarter to quarter. MayQ was very strong, but AugQ was more mixed. Hopefully, results in NovQ show improvement.
- OUR VIEW
- LEARNING CENTER