Although no sector has been particularly safe the past couple months, some stocks seem to have more of a sustainable future than others -- and certainly, AZEK (NYSE: AZEK), a company nestled between industrials and ESG (Environmental, Social, and Governance, an investment methodology that measures the environmental and societal impact of a business), is one that seems to have everything lined up in its favor. Although the company’s been impacted by overall market trends, its product portfolio is very different from other building materials companies, and for this reason, it may see stronger sales as the competition struggles to fill orders.
An overview of AZEK
A newcomer to a sector that few consider sexy, AZEK may have flown under many people’s radar since its mid-2020 IPO. Unless you’re up to speed in building materials, you wouldn’t be following it. But while building material suppliers are suffering due to shortages, AZEK doesn’t have the same challenges. It specializes in building materials for the outdoor living market, specifically, composite alternatives to natural materials like stone and lumber, made with a high percentage of recycled material and manufactured domestically.
Why are its core values on trend?
AZEK occupies a sweet spot at the intersection of industrials and sustainability. Its specialty in eco-friendly alternatives to traditional building materials is poised for increasing popularity, for a variety of reasons. First, there are major shortages in traditional building materials like lumber and steel. Second, the company’s commitment to using recycled materials makes it hugely appealing to environmentally conscious investors. Third, AZEK products are designed to be low-maintenance in comparison with traditional materials, a trait that will increase the products’ popularity amongst homeowners over time.
What is the ESG movement?
The ESG movement is an investment methodology used by socially conscious investors. ESG stands for "Environmental, Social, and Governance." More and more dollars are being allocated for social impact investing, and of those, many are earmarked for "saving the environment."
How does AZEK fit into the ESG movement?
There are thousands of start-ups that are working to save the environment in large or small, practical or totally conceptual ways. Entire venture capital firms are dedicated to environmental impact start-ups. But it’s not so common to see an established, publicly traded company that’s focused on environmental sustainability -- especially not in sectors like construction and industrials.
Coming up on four decades in business, AZEK established itself as an inventor and supplier of alternatives to natural building materials many years before this was trendy. AZEK’s focus on material science, especially with its commitment to use recycled products, is credible from a broad application standpoint: The company has a track record and a solid customer base among commercial clients. Not only that, it holds more than 100 patents.
The company’s focus on creating products that are lower-maintenance than natural materials has always been a smart selling point, and certainly one that was necessary in past years when natural materials were considered more aesthetically pleasing and higher quality. Now the low-maintenance messaging point is more of a bonus you get for buying an environmentally conscious composite. And on top of this, there’s a strong possibility that AZEK will see a medium-term sales boost from builders who simply can’t wait for regular lumber because their customers want to see projects completed.
The bottom line
When AZEK went public at the start of the pandemic summer, critics noted its heavy debt load ($1.2 billion, according to Marketwatch, at the point of its June IPO) but made less of its considerable accruement of knowledge into applied material science. The stock’s recent performance seems to be tied to the overall market trends for its sector, not its medium-term revenue potential. The company’s access to basic materials isn’t the same as other companies in the sector because it manufactures domestically and doesn’t rely on natural raw materials. Therefore, its potential can be tied to demand for new housing that is family-friendly, reasonably priced, and aligned with the millennial and Gen Z "ESG" value system.