AZEK Co. Delivers Q2 Beat on Residential Strength, Eyes Merger-Driven Growth

AZEK Co. (NASDAQ: AZEK) reported second-quarter 2025 results that exceeded expectations, with net sales of $452.2 million—$7 million above the FactSet consensus—driven by strong demand in its Residential segment. The results underscore the company’s dominance in the low-maintenance outdoor decking market, even as it faces headwinds in its smaller Commercial division. Here’s what investors need to know.

The Earnings Beat: Residential Drives Growth

The Residential segment, which accounts for 96% of AZEK’s sales, grew 9% year-over-year to $437 million, fueled by mid-single-digit residential sell-through growth and new product launches like TimberTech Harvest+ decking and Reliance Rail. The company’s focus on sustainable, low-maintenance products—such as its aluminum deck framing—appears to be resonating with consumers. Meanwhile, the Commercial segment saw sales decline 4% to $15.2 million due to weaker demand in its Scranton Products business, though management expects profitability in this division to improve later in the year.

Margin Dynamics: Strength Amid Costs

While gross profit margin dipped 60 basis points to 37.8% due to input cost pressures, adjusted EBITDA rose 10% to $124.4 million, with margin expanding 40 basis points to 27.5%. This reflects operational discipline: the company’s investments in marketing and infrastructure are paying off. CEO Jesse Singh emphasized that “margin expansion remains a core focus,” even as capital expenditures surged to $46.4 million (up $27.2 million year-over-year) to fund projects like a new Pennsylvania manufacturing site and regional recycling facility.

Balance Sheet and Free Cash Flow: Solid but Caution Ahead

AZEK’s balance sheet remains robust, with $146.7 million in cash and $372.7 million available under its revolving credit facility. However, capital spending and rising input costs have tightened free cash flow: while it improved to $0.7 million (up $34.7 million year-over-year), the company tempered second-half guidance, citing potential macroeconomic uncertainty. Full-year free cash flow is still expected to grow, but investors should monitor how rising costs affect margins in 2025’s second half.

Guidance Reaffirmed: Growth Remains on Track

AZEK reaffirmed its full-year 2025 guidance:
- Net sales: $1.52–$1.55 billion (+5–8% growth).
- Adjusted EBITDA: $403–$418 million (+6–10% growth).
- Adjusted EBITDA margin: 26.5–27.0%.

The company expects Residential sales to grow 6–8% to $1.45–$1.48 billion, while Commercial sales (primarily Scranton Products) will decline to $68–$71 million. Second-half sales growth is projected at 0–4%, with Residential growth of 0–5%, reflecting cautious optimism about consumer spending amid economic headwinds.

Strategic Initiatives: Merger with James Hardie Adds Momentum

A critical catalyst for AZEK is its proposed merger with James Hardie (JHX), a global leader in fiber cement siding. The deal, expected to close by late 2025, could create a construction materials powerhouse. Combined, the companies would have a stronger product portfolio, enhanced distribution channels, and $35–$40 million in annual synergies. This merger positions AZEK to capitalize on the growing demand for sustainable building materials, a theme highlighted by its recognition as one of Barron’s 100 Most Sustainable U.S. Companies.

Conclusion: A Resilient Growth Story

AZEK’s Q2 results reaffirm its ability to deliver above-market growth in a competitive outdoor building materials market. Despite Commercial segment headwinds and rising costs, the company’s Residential dominance, margin discipline, and strategic initiatives—particularly the James Hardie merger—support a bullish outlook. With a 27.5% adjusted EBITDA margin, strong liquidity, and a clear path to free cash flow growth, AZEK is well-positioned to navigate macroeconomic uncertainties.

Investors should watch for execution on the merger timeline and whether the company can sustain its Residential sales momentum in the second half. At current valuations (trading at ~12x 2025E EBITDA), AZEK appears attractively priced for a company delivering 6–10% EBITDA growth. The stock could be a buy for investors seeking exposure to a resilient, high-margin player in the outdoor building materials sector.