BofA resumes James Hardie coverage with buy, $27 target

On Thursday, BofA Securities reinstated coverage on James Hardie Industries (NYSE:JHX) shares, assigning a Buy rating and setting a price target of $27.00. The move comes in the wake of James Hardie’s recent announcement on March 24 about its intentions to purchase The AZEK Company for $8.75 billion. According to InvestingPro data, AZEK currently has a market capitalization of $7.17 billion and has shown significant momentum with a 17% return over the last week. The stock is currently trading above its Fair Value estimate, based on comprehensive analysis available in the Pro Research Report. The transaction terms state that AZEK shareholders are set to receive $26.45 in cash for each AZEK share, plus 1.0340 James Hardie shares to be listed on the NYSE for each share they hold.

AZEK, recognized for its manufacturing of composite and polyvinyl chloride (PVC) decking, railing, and related building products, reported sales of $1.4 billion and an adjusted EBITDA of $379 million for the fiscal year 2024. Recent InvestingPro data shows the company maintains strong financial health with a current ratio of 2.56 and operates with a moderate level of debt, demonstrating solid operational efficiency. Want deeper insights? InvestingPro offers 12 additional key tips about AZEK’s financial position. The closure of the acquisition is anticipated in the second half of 2025, contingent on regulatory and AZEK shareholder approvals, along with standard closing conditions.

BofA Securities highlights several potential long-term benefits from the acquisition. Firstly, the deal would provide James Hardie with a total addressable market (TAM) expansion, as AZEK brings an additional $9 billion TAM in decking and related products, complementing James Hardie’s $14 billion TAM in siding and other exterior products. Secondly, the acquisition is expected to enhance James Hardie’s exposure to the US repair and remodel (R&R) market, which is considered relatively stable due to the aging US housing stock. The proposed combined entity would shift to a 70/30 R&R/new construction exposure, an improvement from the current 65/35 split.

The growth prospects are also promising, as AZEK has seen its residential sales grow at a compound annual growth rate (CAGR) of approximately 15% over the past seven years. InvestingPro data confirms this strong growth trajectory, showing a 5-year revenue CAGR of 13% and a healthy gross profit margin of 37.3%. The company’s robust financial performance is reflected in its impressive Piotroski Score of 8, indicating strong operational efficiency. Discover comprehensive analysis and more metrics in the exclusive Pro Research Report, available for over 1,400 US stocks. Additionally, the acquisition is predicted to yield commercial synergies, with management’s target of $225 million by fiscal year 2030 deemed realistic by BofA Securities. This expectation is supported by third-party research indicating that about 55% of siding contractors also engage in decking projects.

Finally, cost synergies are another area where benefits are anticipated, with James Hardie targeting $125 million in savings by fiscal year 2028. These savings are expected to arise from efficiencies in manufacturing and procurement processes, as well as reductions in commercial and administrative expenses.

In other recent news, The AZEK Group is set to be acquired by James Hardie Industries for $8.75 billion, a transaction that includes AZEK’s net debt of $386 million. This acquisition is expected to enhance James Hardie’s revenue scale to approximately $5.4 billion and improve its pro forma EBITDA margin to 27%, according to Moody’s. As a result of the acquisition announcement, Moody’s has placed AZEK’s ratings under review for a potential upgrade, reflecting governance considerations and the stronger credit profile of James Hardie. Meanwhile, Wolfe Research downgraded AZEK’s stock rating from ’Outperform’ to ’Peer Perform’, citing the acquisition’s valuation details. Fitch Ratings has placed AZEK on a positive rating watch, anticipating benefits from the merger such as improved scale and product offerings, although noting a projected increase in EBITDA leverage to 3.7x. Fitch also revised James Hardie’s outlook to negative due to concerns about increased leverage following the acquisition. Lastly, S&P Global Ratings placed AZEK on CreditWatch with positive implications, indicating potential improvements in credit quality post-acquisition. These developments are pivotal as they shape the financial and operational outlook for both AZEK and James Hardie.

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