By Sam Boughedda
BofA analysts upgraded Azek Company Inc (NYSE:AZEK) to Buy from Neutral and Trex Company Inc (NYSE:TREX) to Neutral from Underperform in a note Wednesday.
The analysts, who lifted Azek's price target to $31 per share from $28 and Trex's to $54 from $47, said the building products industry has moved past the headwinds.
"Following a challenging 2022 for decking and underperformance in Trex (-61% since beginning of 2022) and Azek (-49%) share prices (vs. XHB -19%), we believe the composite decking industry is poised to recover in 2H23," the analysts wrote.
Moreover, BofA believes current sales for both are likely tracking ahead of guidance, which implies double-digit % declines in sell-outs for 2023.
"Our channel checks indicate that sell-out trends have been resilient year-to-date," said the analysts. "Sell-out deterioration in a weaker macro environment is a risk, however, composite decking did outperform overall building products in 2008/2009 (sell-out only down mid-teens). Longer term, Trex and Azek should benefit from the conversion to composite decking (expect to reach 45-50% of the industry from mid-20% currently) driven by consumer preference for products that: (1) are more durable, (2) are environmentally friendly, and (3) require less maintenance."
They added that other factors playing into the upgrades include channel inventory being lean, price-cost tailwinds, and the fact Trex and Azek are positioned to regain market share. However, the firm prefers Azek over Trex, given its valuation and margin tailwinds.
"Our discussions with dealers suggest Trex and AZEK are regaining share through improved service/product availability, better terms and product innovation and breadth," they explained.