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On Tuesday, Citi analysts revised their stance on Azek Co. (NYSE: AZEK), downgrading the stock from Buy to Neutral and adjusting the price target to $51.50, down from the previous $51.00. The stock, which has surged nearly 19% in the past week and commands a market capitalization of $7 billion, currently trades at a P/E ratio of 47.5x. The downgrade follows the announcement of James Hardie Industries’ (NYSE:JHX) intended acquisition of Azek. Shares of Azek closed at $48.56, which is below the approximate offer value of $51.50 per share, consisting of $26.45 in cash and $25.07 in James Hardie Industries stock, calculated using the most recent closing price of JHX’s American Depositary Receipt (ADR).
Citi analysts believe that the proposed acquisition is likely to proceed without significant hurdles. They note that Azek’s current share price offers limited growth potential to their new price target, prompting the change to a Neutral rating. Despite some shareholder concerns regarding the premium offered—especially in comparison to Azek’s 52-week high of $54.91—Citi analysts recognize the strategic rationale for the acquisition within the consolidating U.S. Building Products sector.
The two firms involved in the acquisition are both recognized as leaders in their categories, with a history of double-digit sales growth. Azek has maintained solid financial health with a 6.6% revenue growth in the last twelve months and operates with a moderate debt level. They are also well-positioned to benefit from ongoing trends in material conversion and have established strong relationships with professional contractors, which could lead to commercial synergies. According to InvestingPro, the company maintains strong liquidity with a current ratio of 2.56x.
Citi analysts do not foresee any regulatory issues impeding the merger and also do not anticipate any competing bids emerging for Azek. The combination of these factors supports their revised outlook on Azek’s stock, leading to the updated rating and price target. InvestingPro analysis suggests the stock is currently trading above its Fair Value, with 12 additional ProTips available to subscribers seeking deeper insights into Azek’s valuation metrics and growth prospects.
In other recent news, Azek Co. is set to be acquired by James Hardie Industries in a deal valued at $56.88 per share, based on last Friday’s closing prices. This acquisition involves a combination of cash and stock, offering Azek shareholders $26.45 in cash and 1.034 shares of James Hardie for each Azek share. The transaction, which values Azek shares at a significant premium, has led various analyst firms to update their positions on the company. Truist Securities reaffirmed a Buy rating with a $61 price target, while Benchmark also maintained a Buy rating with a $57 target. BMO Capital Markets raised its price target for Azek shares to $57, maintaining a Market Perform rating. Meanwhile, DA Davidson continues to hold a Neutral rating with a $52 price target. The acquisition is expected to provide synergies and enhance the combined company’s market presence, though it may face a tight shareholder vote due to concerns from James Hardie’s Australian investors.
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