Do you think its reasonable they can expand margins that much over the next few years, given you mentioned the margin for their residential business is already ~similar to Trex? Trex hasnt expanded its own margin much in the last 5yrs. The building blocks they mention look more like they fall under the category of "continue to try run your business more efficiently where possible", rather than some transformative lever they can pull.
Also exiting at 18x EBITDA is roughly equivalent to 33x PE no? (c28% EBITDA margin less 8% of capex, less 24% of tax)
The margin target seems fairly achievable after last quarter's improvement to ~23.5%. Assuming inventory recalibration is finished for residential, AZEK could capture another 250 basis points to get to 26.0% EBITDA margins. The cost inputs seem slightly different for AZEK than TREX as the former leans more on PVC and exterior products (trim/siding). So if AZEK can get a better pipeline of recycled PVC that could help out margins further. However, not achieving 26.0% EBITDA margin would dent the valuation so in this scenario it becomes a risk.
Given the EV/EBTIDA history and exit revenue growth at year five I'm comfortable with that multiple. I also quickly just screened on similar industrial sector companies growing at ~10% and their average P/E is 26.6 according to koyfin so that would argue the multiple for AZEK is a bit high using that lens.
Do you think its reasonable they can expand margins that much over the next few years, given you mentioned the margin for their residential business is already ~similar to Trex? Trex hasnt expanded its own margin much in the last 5yrs. The building blocks they mention look more like they fall under the category of "continue to try run your business more efficiently where possible", rather than some transformative lever they can pull.
Also exiting at 18x EBITDA is roughly equivalent to 33x PE no? (c28% EBITDA margin less 8% of capex, less 24% of tax)
The margin target seems fairly achievable after last quarter's improvement to ~23.5%. Assuming inventory recalibration is finished for residential, AZEK could capture another 250 basis points to get to 26.0% EBITDA margins. The cost inputs seem slightly different for AZEK than TREX as the former leans more on PVC and exterior products (trim/siding). So if AZEK can get a better pipeline of recycled PVC that could help out margins further. However, not achieving 26.0% EBITDA margin would dent the valuation so in this scenario it becomes a risk.
Given the EV/EBTIDA history and exit revenue growth at year five I'm comfortable with that multiple. I also quickly just screened on similar industrial sector companies growing at ~10% and their average P/E is 26.6 according to koyfin so that would argue the multiple for AZEK is a bit high using that lens.
Fair enough. Thanks for the reply, and for the writeup. Enjoyed reading it.
And thank you for the feedback! Always great to know what sort of views other people have after reading and seeing a model.