A 'Messy' Quarter Created a Fine Opportunity

AZZ Inc.'s headline result for the end of August 2022, quarter was a loss of $1.91 per share. The report was released on Oct. 13, just as the overall market was carving out a new yearly low. That combination of factors led to a brutal selloff, which took AZZ to a new 2021-2022 low of $30.21. Most traders get spooked by hard-to-understand numbers and go by the shoot first, ask questions later school of thought. They sold, which accounted for the steep decline. Once management gave its detailed presentation, however, things did not look bad at all. One-time, non-cash charges for disposal of a discontinued operation and charges related to a new acquisition, geared to future growth, totaled $3.15 per share. Adjusted for that, earnings per share were a positive $1.24 per share. Value Line had been looking for $1.00. The stock began rebounding right away. It reached $42.96 intraday on Dec. 6, before drifting back to close last week at $38.70, thanks to overall market weakness. As of Friday's close, 2022, AZZ was up by 28.1% from its mid-October nadir. Many research services still show the GAAP result, which severely understates true economic earnings for this fiscal year (ends Feb. 28, 2023). If you believe Value Line's second-half of the year estimates for AZZ, the firm can post record EPS of $5.15 this year. Yahoo Finance calls for more subdued growth in the final two quarters, but that still projects fiscal 2023 final EPS of $4.43. Fast Graphs is a bit more conservative, using $3.92 as its current year estimate. All three services see at least three more quarters of positive year-over-year comparisons. The data below employ fiscal 2023 results toward the lower end of projections. Even so, AZZ grew decently over the past decade. Today's share price fails to reflect most of the value already created. It also fails to consider management's newly implemented strategies to boost future growth. A good-sized catch-up move higher appears to be waiting in the wings. What is AZZ worth? From 2012 through 2021 the stock's average P/E ran 19.8-times, accompanied by about 1.41% in yield. All four of AZZ's should have sold moments (red-starred below) reflected above normal multiples and below average yields. All six of AZZ's best entry points (green-starred) launched their rallies from below average P/Es while rewarding investors with above typical yields. At $38.70, AZZ sells for just 9.1-times next year's Value Line estimate while paying 1.76% along the way. Simply getting back to a still below normal 18 P/E could easily send AZZ up to $76.50 by February of 2024. That implies over 102% appreciation potential plus any dividends collected. Revenues are poised for a large gain of about 66% in the current year, followed by a further 13% or so during the subsequent year. Yahoo Finance calls for AZZ to hit $51.50 within a year, providing a solid total return. Its goal price is far from an upper limit, though, as it assumes AZZ trades for less than 12-times fiscal 2023's earnings. FastGraphs research calls AZZ's typical P/E as 17.55-times. That is much higher than its current blended P/E of only 10.2-times. Simply reverting to what FastGraphs calls a normal valuation for AZZ supports an end of February 2024, goal price of $68.80. In the world we all live in, over 79% annualized in total return is a staggeringly good result. Option-savvy traders could nibble at the edges, while playing AZZ via sales of naked puts out to Aug. 18, 2023. Actual pricing on its $35 - $45 strike prices, with AZZ at $38.70, are shown below. Worst-case, forced purchase prices would drop to $32.55, $35.50 or $37.30 respectively allow for generous margins of safety vs. the trade inception price. Best-case gains of these, or any other option sales, always equals keeping 100% of all money received up front. AZZ is a fine company temporarily selling for well below its proper price. Buy some shares, short some puts, or consider doing both.

A 'Messy' Quarter Created a Fine Opportunity

Here's how to trade this fine company temporarily selling for well below its proper price.

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