FA Alpha Daily

Improving infrastructure means more demand for this companies products

As investments in infrastructure continue to expand, the demand for corrosion protection and specialized electrical equipment is expected to rise. These developments perfectly align with AZZ Inc.’s core strengths and product offerings, including metal coating services, specialty electrical equipment, and highly engineered services designed to support, maintain, and repair infrastructure across diverse industries. In today’s FA Alpha, we explore AZZ’s potential for delivering high returns despite the market’s modest expectations.

FA Alpha Daily:
Tuesday Company Specific
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The pandemic made us realize how old and sensitive our infrastructure and supply chains are. Now, the government and companies are working together to renew and replace our infrastructure.

We have been seeing increasing investments in infrastructure used to modernize aging systems, spur economic growth, and promote sustainable and resilient communities.

Some specific measures include the Infrastructure Investment and Jobs Act of 2021, which earmarked over $1 trillion for a variety of projects.

This legislation provides funding for the repair and expansion of roads and bridges, the development of high-speed rail systems, enhancements to public transit systems, and upgrades to broadband networks to ensure more comprehensive digital access.

The bill also dedicates funds to improve water infrastructure and invest in green energy projects, reflecting a broader aim to tackle climate change and prioritize sustainability.

Through these initiatives, the U.S. aims to boost economic competitiveness and enhance the quality of life for its citizens.

But infrastructure needs certain elements to be built up. And this is where companies like AZZ (AZZ) come in.

AZZ is a global provider of metal coating services, welding solutions, specialty electrical equipment, and highly engineered services to support infrastructure in various industries.

They offer galvanizing services for corrosion protection of fabricated steel products and produce electrical equipment designed for the generation, transmission, and distribution of electrical power.

Additionally, AZZ provides services to maintain and repair facilities and infrastructure, ensuring they operate in a safe and efficient manner.

With the huge investment in infrastructure from the U.S. government, companies like AZZ stand to benefit.

As the country undertakes the task of modernizing and expanding its infrastructure, there will be a heightened demand for corrosion protection of steel structures, such as bridges and transportation networks, where galvanizing services are crucial.

Additionally, as electrical grids and power infrastructure are upgraded or expanded, AZZ’s specialized electrical equipment will be in greater demand.

The emphasis on maintaining and ensuring the safety and efficiency of existing and new infrastructure will further lead to opportunities for the company’s engineered services.

In essence, the sweeping investments in infrastructure directly align with many of AZZ’s core competencies and offerings.

The beginning stages of infrastructure growth are already underway and we can see this in AZZ’s recent return on assets (“ROA”) growth.

AZZ’s ROA jumped from 6% in 2021 to 11% in 2022 and then to 22% in 2023.

The chart shows that the company has performed incredibly well in an environment of increasing investment in infrastructure. Clearly, as these investments continue, AZZ should continue performing well.

And yet, the market fails to recognize this opportunity.

We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s ROA to fall to 10%, assuming the demand will collapse.

Given the growth of infrastructure and the company’s essential position in supplying its growth, these expectations seem overly pessimistic.

AZZ has substantial potential to scale its operations and continue benefiting from the growth in infrastructure.

That is why AZZ showed up on our screen. The company makes a great FA Alpha 50 name due to its potential for high returns and low expectations from the market.

Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up in investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

To see the other 49 names on the list, click here.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

We are inviting you to attend FA Alpha’s upcoming CAIA Hong Kong event on Wednesday, 11/1, at 6:30 PM HKT to learn about the latest macroeconomic trends affecting the global economy.

Today’s highlight, AZZ Inc. (AZZ) is one of the top stock picks from FA Alpha 50 this month. To see more stock picks like this, become an FA Alpha and get access to FA Alpha 50.

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