AZEK: overvalued or an opportunity?

AZEK Company Inc (NYSE: AZEK) is a company dedicated to the development of sustainable materials for outdoor products, however what is most striking is the fact that it is a company with one of the highest P/E ratios (Price-Earnings Ratio) on Wall Street, 290 at the time of writing. So you might be wondering, why does a company that you might have never heard of, have such a high P/E ratio? And what does its future hold?

Before we continue, we must remember that the P/E ratio indicates how much investors are willing to spend for each dollar of a company’s earnings when purchasing a share, in order to get an idea for whether the stock is undervalued or overvalued. So the fact that AZEK Company (NYSE: AZEK) has a P/E of 290 is more than eye-catching, it’s alarming. To further put this number into perspective, if we compare it with APPLE (NASDAQ: AAPL), which is a company historically with a high P/E; currently, its price-earnings ratio is 30.

So you must be thinking, why is this happening? Well, it can be a difficult question to answer; when a company has a high P/E, it can mean that shareholders expect earnings to increase significantly in the future. Let’s take a quick look at how net earnings have fared in recent years. In 2020 it went to a loss; in 2021, it was a net profit of $93 million, while in 2022, the profit decreased to $75 million. Another interesting fact is that the net profit margin in 2022 was 5.5% and is currently just over 1%.

So, if earnings do not support it, more questions arise as to why the share price is so high relative to earnings. One may think that since AZEK Company (NYSE: AZEK) is a company so committed to the environment, generating recycled and sustainable products. In tandem, the world is becoming more responsible with its resources, where companies like AZEK may come to the forefront in the coming years. Even so, will this prominence be transformed into extraordinary profits?

Let’s say hypothetically we wanted to lower the P/E of AZEK Company (NYSE: AZEK) to a more “reasonable” figure like 29; what would have to happen? For one, earnings per share would have to increase by no less than 1000%, or the stock would have to go from $26 to $2.6. Although I am not saying that this will happen, it is interesting to see possible scenarios in numbers in order to carry out a better analysis before investing and not get any surprises.

There is no doubt that AZEK Company (NYSE: AZEK) is a company whose great value lies in its societal contribution by being very committed to its mission as a company, which is to improve the environment. The company takes PVC waste generated by other companies and turns it into finished outdoor products such as decks, furniture, porches, among others.

So you would think that as the world becomes more environmentally conscious, companies like AZEK Company (NYSE: AZEK) will emerge as protagonists in the future, and that is the reason for its high P/E ratio. Will this projected success materialize into extraordinary profits?