Executive Summary / Key Takeaways

• AZZ has completed its strategic transformation into a pure-play metal coatings leader, divesting non-core assets and acquiring Precoat Metals to create a focused, high-margin business with durable competitive moats and clear infrastructure tailwinds.

• The company is at a capital allocation inflection point, having received $273 million from the AVAIL JV divestiture, cut net debt from $852 million to $567 million, and repriced its Term Loan B to save $3.3 million annually, positioning it for disciplined M&A and shareholder returns.

• Metal Coatings segment delivers 30%+ EBITDA margins with pricing power intact despite weather disruptions and mix shifts, while Precoat Metals is gaining market share as tariffs drive pre-painted imports down 23-50%, demonstrating resilience in challenging end markets.

• Infrastructure Investment and Jobs Act funding ($319 billion committed, $177 billion outlaid) combined with energy transition megatrends (data centers, solar, transmission) provide multi-year demand visibility that supports management's 10-20% adjusted EPS growth guidance for fiscal 2026.

• Trading at 11.3x EV/EBITDA versus direct competitors at 14-17x, with superior margins (19.7% net profit margin) and improving ROE (27.3%), AZZ offers an attractive risk/reward profile as margin headwinds from transformation efforts abate and operational leverage accelerates.

Setting the Scene: The Making of a Metal Coatings Pure-Play

AZZ Inc., founded in 1956 and incorporated in Texas, has spent nearly seven decades building industrial solutions, but the company that exists today bears little resemblance to its diversified past. The transformation began in earnest after the COVID-19 pandemic, when management made the decisive strategic shift to become a "pure-play Metal Coatings company," encompassing both hot-dip galvanizing and coil coating solutions. This wasn't a simple rebranding—it was a fundamental restructuring involving strategic acquisitions, divestitures, and a complete refocusing of capital allocation.

The 2022 acquisition of Precoat Metals expanded AZZ's reach into aesthetic and corrosion protective coatings for steel and aluminum coil, creating a second growth pillar alongside its legacy hot-dip galvanizing business. The September 2022 sale of a majority interest in its AIS business to Fernweh Group, retaining a 40% non-controlling stake in the AVAIL joint venture, marked the beginning of the exit from non-core infrastructure solutions. The May 2025 completion of AVAIL's sale of its Electrical Products Group to nVent Electric (NVT) for $975 million, with AZZ receiving $273.2 million in cash distribution, represented the final chapter of this transformation.

This strategic journey has created a simplified, more defensible business model with clearly defined competitive moats and superior margin profiles. AZZ now operates through three distinct segments: AZZ Metal Coatings (hot-dip galvanizing, spin galvanizing, powder coating), AZZ Precoat Metals (coil coating for construction, appliance, HVAC, container, and transportation markets), and a 40% interest in the remaining AVAIL JV (welding services, lighting, and international joint ventures).

This focused structure allows investors to evaluate the company against pure-play comparables and understand the true drivers of value creation.

The metal coatings industry sits at a critical intersection of infrastructure investment, reshoring trends, and sustainability mandates. AZZ's tolling model—where it processes customer-owned steel and aluminum without taking commodity price risk—provides insulation from volatile raw material markets while generating recurring revenue from essential corrosion protection services. With 41 galvanizing locations and 14 coil coating facilities across North America, the company has built a geographic footprint that creates meaningful barriers to entry and supports its 28% market share in hot-dip galvanizing and 23% in coil coatings.

Technology, Products, and Strategic Differentiation

AZZ's competitive advantage extends beyond physical assets to proprietary technology and operational systems that drive measurable economic benefits. The Digital Galvanizing System (DGS) platform provides real-time production updates and business intelligence across all 46 Metal Coatings locations, enabling paperless operations, improved service transparency, and enhanced production efficiencies. When AZZ acquired Canton Galvanizing in July 2025 for $30.1 million, management quickly integrated the facility onto both Oracle and DGS platforms, demonstrating the scalability of this technology stack.

The Washington, Missouri aluminum coil coating facility represents the company's most significant technological and capacity expansion. This 25-acre greenfield facility, which began commercial production in March 2025, is supported by a take-or-pay contract covering approximately 75% of its output, de-risking the $121.8 million total investment. The facility is currently running at about 20% of capacity, with management expecting to reach 50% utilization in Q3 and Q4 of fiscal 2026. This ramp-up trajectory creates a visible path to margin expansion as fixed costs are absorbed by growing volumes, with gross margins anticipated to turn positive in the second half of the year.

The coil coating process itself provides sustainability benefits that resonate with end-market customers. By cleaning, treating, painting, and curing metal coils as flat material before fabrication, AZZ delivers enhanced product lifecycles and environmental advantages compared to post-fabrication painting. This positions the company to benefit from the secular shift from plastic to aluminum packaging in food and beverage industries, a trend management describes as a "critical long tail secular trend." The container and beverage end markets reached new highs in Q2 FY2026, indicating momentum in this conversion as production ramps at Washington, Missouri.

Technology differentiation also manifests in operational resilience. When severe weather impacted Q4 FY2025, causing over 200 lost production days and an estimated $8-12 million revenue impact, the company's diversified facility network and digital systems enabled a strong recovery. Metal Coatings sales rose 6% in Q1 FY2026, with management noting that about half the benefit was pure organic growth beyond simple weather recovery, demonstrating the underlying demand strength and operational leverage in the platform.

Financial Performance & Segment Dynamics: Evidence of Strategy Execution

AZZ's financial results provide compelling evidence that the pure-play transformation is delivering tangible value. For the three months ended August 31, 2025 (Q2 FY2026), consolidated sales increased 2% to $417.3 million, but the segment-level performance reveals a more nuanced and encouraging story. Metal Coatings sales surged 10.8% to $190 million, driven by a $22.1 million increase in steel processed volume, partially offset by a $2.8 million decrease in selling price due to product mix shifts toward solar and transmission distribution projects.

This mix shift is noteworthy because these infrastructure projects carry slightly lower margins but provide more stable, long-term demand tied to IIJA funding and energy transition megatrends. Metal Coatings operating margins of 27.2% in Q2 FY2026, while down slightly from prior peaks, remain firmly within management's sustainable target range of 27% to 32%. The segment's ability to maintain 30%+ EBITDA margins despite weather disruptions, mix shifts, and integration costs demonstrates pricing power and operational excellence that competitors struggle to match.

Precoat Metals presents a more complex but equally instructive picture. Q2 FY2026 sales declined 4.3% to $227.3 million due to lower coil coated volume in softer building construction, HVAC, and appliance end markets. However, the segment is gaining market share as tariffs reduce pre-painted imports by 23% year-over-year, with some months seeing 50% declines. Management explicitly stated they are "picking up 3% or 4%" market share to offset the roughly 9-10% market decline, and critically, "it's not like we've had to go aggressively discount to take that share." This pricing discipline, combined with the Washington, Missouri ramp-up, positions Precoat for margin recovery as volumes stabilize.

Corporate cost discipline reinforces the margin story. Selling, general, and administrative expenses decreased 12.5% to $32.8 million in Q2 FY2026, falling to 7.9% of sales from 8.8% in the prior year quarter. Interest expense plummeted $8.2 million to $13.7 million due to a $304.4 million decrease in weighted average debt outstanding and a 1.77% reduction in weighted average interest rate. The August 2025 repricing of Term Loan B from SOFR plus 2.50% to SOFR plus 1.75% will generate approximately $3.3 million in annual interest savings, directly flowing to free cash flow.

The balance sheet transformation is perhaps the most compelling financial narrative. Long-term debt net has been slashed from $852.4 million as of February 28, 2025 to $566.9 million as of August 31, 2025.

Net leverage ratio improved dramatically from 2.7x in Q2 FY2025 to 1.7x in Q2 FY2026, well below the company's target range of 1.5 to 2.5 times. This deleveraging, funded by the $273.2 million AVAIL distribution and strong operating cash flow of $373.2 million in the first half of FY2026, provides strategic flexibility that was previously constrained by debt service requirements.

Outlook, Management Guidance, and Execution Risk

Management's fiscal 2026 guidance reflects confidence in the transformed business model while acknowledging near-term headwinds. The company reiterated expectations for total sales of $1.625 billion to $1.725 billion, adjusted EBITDA of $360 million to $400 million (with the lower half more likely due to the loss of AVAIL equity income), and adjusted diluted EPS of $5.75 to $6.25, representing 10-20% growth over fiscal 2025. This guidance assumes continued infrastructure spending from IIJA, which has committed $319 billion in funds with $177 billion already outlaid by the Department of Transportation, and $74.9 billion obligated by the Department of Energy.

The Washington, Missouri facility ramp represents the most significant execution variable. Management expects the facility to be a "slight drag on margins" in the first half of fiscal 2026 before turning positive in the second half, with capacity reaching 50% in Q3 and Q4. The facility's current 20% utilization running commercial production creates a clear path to margin expansion as fixed costs are absorbed. The take-or-pay contract covering 75% of output de-risks the revenue ramp, while the secular shift to aluminum packaging provides long-term demand visibility.

The AVAIL JV transition introduces a modest EBITDA headwind but simplifies the investment narrative. Following the EPG sale, AZZ's 40% interest in the remaining welding services, lighting, and international joint ventures is expected to contribute zero to equity earnings for the remainder of fiscal 2026. While this removes a prior income source, it eliminates complexity and allows management to focus capital and attention on the core coatings business. The $45.9 million impairment charge taken in Q2 FY2026 reflects a clear-eyed assessment of the remaining JV's reduced earnings power, cleaning up the balance sheet for future growth.

Management's capital allocation strategy has explicitly shifted toward "investments in organic growth and strategic M&A, while returning value to shareholders through cash dividends and share buybacks." The board's 17.6% increase in the quarterly dividend to $0.20 per share and the authorization for opportunistic share repurchases signal confidence in sustained cash generation. With net leverage at 1.7x and $361.3 million in available credit capacity, AZZ has substantial firepower for bolt-on acquisitions like the Canton Galvanizing deal, which was immediately accretive and expanded Midwest capacity.

Risks and Asymmetries: What Could Break the Thesis

The investment thesis faces several material risks that investors must monitor. Tariff uncertainty creates project delays and customer hesitation, particularly in non-infrastructure related Precoat end markets. Management noted that "ongoing tariffs have contributed to customer hesitation on non-infrastructure related projects," with the impact being "more likely slightly negative in Q3" and "probably more negative in Q3 than the upside." This dynamic could pressure Precoat volumes beyond current expectations, though market share gains from reduced imports provide a partial offset.

Weather-related disruptions represent a recurring operational risk. Q4 FY2025 experienced "significantly more inclement weather days than in a typical year," resulting in over 200 lost production days and an estimated $8-12 million revenue impact. While Q1 FY2026 showed strong recovery, the fourth quarter remains seasonally weak due to winter holidays and construction slowdowns. This cyclicality is manageable but creates quarterly volatility that can obscure underlying trends.

Commodity price exposure, while mitigated by the tolling model, still presents margin pressure. Zinc LME prices have continued to trend upward, affecting kettle costs 6-8 months out. Natural gas, steel, and aluminum scrap price fluctuations impact both segments, with management noting that secondary supply items have seen tariff-driven price increases requiring negotiation. The company's ability to pass through cost increases varies by end market, with infrastructure projects typically offering better pricing flexibility than commercial construction.

The Washington, Missouri facility ramp carries execution risk. While the take-or-pay contract de-risks revenue, operational challenges during scale-up could delay margin improvement. Management's guidance assumes the facility turns gross margin positive in the second half of fiscal 2026, but any setbacks would pressure consolidated EBITDA margins and reduce the return on this $121.8 million investment.

Competitive dynamics warrant attention. While AZZ holds leading market shares, competitors like Valmont Industries (VMI) and Hill & Smith are adding galvanizing capacity, and Steel Dynamics (STLD) is adding paint lines to mill capacity. Management views these additions as "relatively normal" and not fundamentally changing supply/demand, but increased capacity could pressure pricing if demand softens more than expected. AZZ's ability to sustain 30%+ EBITDA margins in Metal Coatings depends on maintaining its technology and service differentiation.

Valuation Context: Positioning Relative to Cash Generation and Peers

At $104.75 per share, AZZ trades at a market capitalization of $3.15 billion and an enterprise value of $3.75 billion. The valuation metrics reveal a compelling disconnect between the company's transformed financial profile and its market pricing. The enterprise value to EBITDA multiple of 11.3x sits well below direct competitors: Powell Industries (POWL) trades at 15.1x, Valmont Industries at 14.1x, Lincoln Electric (LECO) at 17.3x, and Mueller Industries (MLI) at 11.3x. This discount persists despite AZZ's net profit margin of 19.7% exceeding all peers except Mueller's 18.1%.

The price to free cash flow ratio of 7.7x and price to operating cash flow of 6.3x are particularly attractive for a business with AZZ's margin profile and growth prospects. These multiples compare favorably to the peer range of 16-25x, reflecting the market's failure to fully appreciate the capital efficiency of the tolling model and the reduced capital intensity following the Washington facility completion. With fiscal 2025 free cash flow of $134 million and management targeting $60-80 million in fiscal 2026 capex, cash generation should accelerate as growth investments moderate.

Balance sheet strength further supports the valuation case. Net debt to EBITDA of 1.7x provides substantial flexibility within the company's 1.5-2.5x target range, while the current ratio of 1.73x and quick ratio of 1.19x demonstrate solid liquidity. The return on equity of 27.3% exceeds all peers except Lincoln Electric's 38.1%, indicating effective capital deployment. The modest dividend yield of 0.71% with a payout ratio of just 6.8% suggests significant room for dividend growth as the capital allocation strategy matures.

Management's own assessment of valuation provides telling insight. During the Q1 FY2026 earnings call, CEO Tom Ferguson stated, "We believe AZZ continues to be undervalued at nine to ten times forward EBITDA which gives us confidence to buy back our stock." With the stock currently trading at the low end of this range despite improved fundamentals, the disconnect between intrinsic value and market price appears pronounced.

Conclusion: A Transformed Competitor at an Inflection Point

AZZ has successfully executed a strategic transformation that has fundamentally improved its business quality and financial flexibility. The pivot to pure-play metal coatings has created a focused company with industry-leading market positions, durable 30%+ EBITDA margins in Metal Coatings, and improving operational leverage in Precoat Metals as the Washington facility ramps. The capital allocation strategy has shifted from debt reduction to balanced growth investment and shareholder returns, with net leverage at 1.7x providing substantial optionality for accretive M&A.

The investment thesis hinges on two critical variables: the successful ramp of the Washington, Missouri facility to drive Precoat margin expansion, and the company's ability to execute its M&A pipeline while maintaining pricing discipline. The multi-year infrastructure tailwinds from IIJA funding, energy transition, and reshoring provide demand visibility that supports management's 10-20% adjusted EPS growth guidance, while market share gains from tariffs demonstrate competitive resilience.

Trading at a discount to peers on cash flow metrics despite superior margins and a de-risked balance sheet, AZZ offers an attractive risk/reward profile for investors seeking exposure to domestic infrastructure spending with downside protection from the tolling model and upside optionality from capital deployment. The company's 69-year history of adaptation suggests it is well-positioned to compound value in its next chapter as a focused metal coatings leader.