Wednesday, November 11, 2020

A Small Cap Equity holding: Trex Company (TREX, $79.61): “Trekking through the Pandemic” by: By: Prachi Patel, AIM Student at Marquette University

  Trex Company (TREX, $79.61): “Trekking through the Pandemic”

By: Prachi Patel, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


• Trex Company, Inc. (NYSE:TREX) is a major worldwide manufacturer of wood-alternative decking, railing and other outdoor products, produced from recycled material. Trex has two business segments, Trex Residential and Trex Commercial, which make up 93.1% and 6.9% of the revenue, respectively, for a total net income for FY’19 of $144.7 million.

• Trex Company has experienced tremendous growth of 152.50% in stock price, from March 18th to November 6th.

• Trex Company Inc. has been listed in Fortune magazine’s 100 Fastest-Growing Companies and has also earned the 2020 Sustainability Leadership Award due to their 95% recycled products.

• In Q3, the residential segment has seen a 20% increase in revenue, and due to their highly efficient operating model, they were able to offset expenses and secure a 13% increase in net income and a 29% adjusted EBITDA margin.

• For Q4, the company has projected YoY sales growth of 30% and for 2021, a double-digit sales growth.

Key points: 

Trex is the world’s largest manufacturer of wood-alternative decking, railing, fencing, and many other products, with over 25 years industry experience. Being in this rare business sector, they are a national provider of custom-engineered railing and staging for commercial and residential properties. They also have more than 6,700 retail locations around the world. These competitive advantages are pivotal to Trex’s success and will be crucial in the upcoming years as they aim to reach heights.

COVID-19, while providing much disturbance and imbalance within business and the economy as a whole, Trex has seemed to experience tailwind during the pandemic. This past year they experienced record numbers due to an increasing end market demand that has propelled them to open locations in many different countries. This is has made them a global presence and contributed largely to their 152.50% stock price growth. Trex’s LTM net income is $167.8M, which is a $23.1M increase in an environment plagued with a globally weak economy. The sales for FY’19 and LTM were $745.3 and $817.3, respectively, a staggering 9.66% increase in sales. The growth of the business has allocated the earnings towards their capacity expansion capital expenditure which is $100M for the 9-month 2020 period.

What has the stock done lately?

The stock price for Trex has been on a steady incline for the past 5 years with very few hiccups. Those few hiccups are directly related to the behavior of the entire stock market, so the effects are more external than internal. However, in terms of the growth in stock price, Trex has been performing well due to strong earnings and management.  

Past Year Performance: Trex has increased 81.3% in value over the past year, and it does not look like it will be stopping anytime soon. In addition, March lows only lasted for about 2 months, or until May 5th, where it was able to exceed the previous ATH. In comparison, the Russell 2000 has been unable to reach the ATH as of date.  

Source: FactSet

My Takeaway

Trex Company, Inc. has recovered remarkably well from the depths of the coronavirus pandemic, despite much global economic unrest. Trex Company, Inc. was one of the best performers for the Q3 analysis of AIM’s Small Cap Equity Fund. As we discovered, Trex was deeply impacted with the difficulties of the pandemic, but with exceptional management and their growth into the residential sector, they have proven to be a worthy investment. It is recommended that more of Trex’s holdings are added to the AIM Equity fund.

Source: FactSet