Wednesday, December 15, 2021

A Small Cap Equity holding: Trex Company Inc. (TREX, $132.49): “No Splinters in This Trex” By: Michael O’Donnell, AIM Student at Marquette University

 Trex Company Inc. (TREX, $132.49): “No Splinters in This Trex”

By: Michael O’Donnell, 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 the world’s largest manufacturer of composite decking products. These wood-alternative products are made up of 95% recycled materials such as plastics and reclaimed wood. Trex is separated in two reportable segments: Residential (94% of FY20 revenue) and Commercial (6%). Residential is responsible for decking, fencing, outdoor furniture, etc. Whereas Commercial provides architectural and aluminum railing and staging equipment.

• Trex is continuing to see exceptional growth in the top and bottom line.

• Management expects composite to control 24-25% of the total decking market.

• Construction of a 3rd production site will begin in 2022 in Little Rock, Ar.

• Trex has received lots of recognition in 2021.

Key points: When Trex reported Q3 2021 earnings investors were impressed. Revenue and Net Income were up 45% and 73% YOY, respectively. Gross margins were 150bps better than Q3 of 2020. This improvement is impressive considering that management noted they faced 750bps of pressures due to inflation, higher transportation costs, and labor shortages. Gross margins are expected to improve in Q4 as price increases will be applied to their products.   

Today lumber prices are almost 2x greater than prior pandemic levels. This has allowed composite to gain substantial ground in the $4.1 billion total decking market. In 2020 composite held about 22% of the market with wood holding the remainder. By the end of this year, it is projected that composite will hold 24-25%. Each percentage gain represents more than $50 million in composite sales. This storm of higher lumber costs, decreased maintenance costs, and positive environmental effect is greatly helping composite gain share in this market.

To capitalize on this gain in market share, Trex will be starting production on a third plant in Little Rock, AR. This move gives the company greater proximity to raw materials and access to a strong labor market. Trex also invested a combined $200 million in their Nevada and Virginia sites to increase capacity.

In 2021, Trex has received lots of recognition such as: America’s Most Trusted Outdoor Decking Brand, one of America’s Best Mid-Size Companies by Forbes, Greenest Decking, and many others. These awards speak to their strong management team, great products, as well as their focus on how they treat our environment.

What has the stock done lately?

Since the Q3 Earnings Report on November 8th, Trex share price has increased by 14.36%. In mid-October shares were hovering above $90 due to RSI levels being around 28. This overselling was not due to any news stories.

Past Year Performance:

Trex has increased 81.87% over the past year. If management is correct about gross margins being able to hit north of 40% in 2022 as well as the increase in revenues, the share price will continue to outperform the Russell 2000.

Source: FactSet

My Takeaway

Trex’s management has continued to put up strong numbers in times of inflationary and transportation pressures as well as labor shortages. This ability and their investments in production have shown that they are poised to capture even more of the total decking market. I believe that Trex will continue to grow for the foreseeable future, and it is in the best interest of the AIM Small Cap Portfolio to hold this investment.

Source: FactSet