AZZ Inc.'s Q1 FY2026 Earnings Call: A Strategic Opportunity Amid Structural Tailwinds

The industrial sector has long been a barometer of economic resilience, and few companies exemplify this better than AZZ Inc. (AZZ). With its Q1 FY2026 earnings call, AZZ has demonstrated its ability to navigate cyclical challenges while positioning itself at the intersection of two powerful trends: infrastructure modernization and ESG-driven demand for sustainable materials. The divestiture of its Electrical Products Group, margin improvements, and disciplined capital allocation strategy now create a compelling case for investors to consider AZZ as a strategic buy.

Divestiture of the Electrical Products Group: A Bold Bet on Core Competency

AZZ's decision to sell its Electrical Products Group to nVent Electric for $975 million in early 2025 was a pivotal move. While the transaction reduced AZZ's revenue base by ~30%, it allowed the company to focus on its core metal coating businesses—galvanizing, coil coating, and specialty corrosion protection—which are critical to infrastructure and industrial markets. By retaining a 40% stake in the remaining AVAIL JV (focusing on industrial lighting and welding solutions), AZZ has insulated itself from volatile electronics demand while doubling down on secular growth drivers like infrastructure spending and reshoring trends.

The proceeds from the sale have been deployed to slash debt, reducing leverage to below 2.5x EBITDA—a key milestone for a company with historically high capital intensity. This deleveraging not only reduces interest expenses (projected to fall by $7M YoY) but also frees up cash for shareholder returns and strategic M&A.

Margin Improvements: Operational Excellence and Structural Tailwinds

AZZ's Q1 FY2026 results highlight the fruits of its operational discipline. The Metal Coatings segment posted an EBITDA margin of 29.2%, up 60 basis points YoY, driven by cost controls and the ramp-up of its $115M Missouri coil coating plant. This facility, now fully operational, processes high-value tolling contracts, shielding AZZ from commodity price swings while boosting margins. The Precoat Metals segment stabilized at 17.8% margins, aided by volume growth in solar and HVAC markets.

The company's tolling model—where customers pay AZZ to coat their raw materials—has proven a powerful hedge against zinc and natural gas price volatility. This model, combined with pricing discipline, has enabled AZZ to outperform peers in margin resilience.

Capital Allocation: Prioritizing Balance Sheet Strength and Shareholder Returns

AZZ's capital allocation strategy is a masterclass in financial discipline. With the Missouri plant operational, FY2026 CapEx is projected to drop to $60–80M, a 30% reduction from FY2025. This allows the company to accelerate debt paydown—targeting $165M in reductions—and maintain its $0.17 quarterly dividend. While buybacks are not yet prioritized, the $200M+ in proceeds from the AVAIL sale creates flexibility for opportunistic acquisitions in its core segments.

The company's focus on ESG integration further aligns with long-term value creation. The Missouri plant, for instance, uses zone-coating technology to reduce energy consumption by 20%, meeting ESG mandates while lowering operating costs.

Why AZZ is a Buy: Structural Tailwinds and a Compelling Valuation

AZZ sits at the nexus of two unstoppable trends:
1. Infrastructure Spending: The Infrastructure Investment and Jobs Act (IIJA) is expected to boost demand for AZZ's corrosion-resistant coatings in bridges, pipelines, and renewable energy systems.
2. ESG-Driven Demand: Companies under pressure to decarbonize are increasingly adopting AZZ's sustainable materials for industrial applications.

With a 12% EBITDA growth guidance for FY2026 ($360–400M) and a 17% EPS growth midpoint ($5.80), AZZ is pricing in these tailwinds. At a 14x 2026E P/E, it trades at a discount to industrial peers, offering both growth and value.

Risks to Consider

• Raw Material Volatility: Zinc and natural gas prices could compress margins if not offset by pricing.
• Macroeconomic Slowdown: A recession could delay infrastructure projects.

Conclusion: A Strategic Buy with Multiyear Upside

AZZ's Q1 results confirm its transition from a leveraged, diversified industrial player to a lean, ESG-focused materials specialist. The divestiture of its non-core business has sharpened its focus, while margin improvements and balance sheet strength position it to capitalize on infrastructure and ESG trends. With a buy rating and a 12-month price target of $65 (implying 20% upside), AZZ is a rare blend of cyclical resilience and secular growth. Investors seeking exposure to infrastructure and ESG themes should take note: AZZ is building a moat in a market that will only grow.