By:
Michael Robinson, 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.
Summary
• Trex Co. Inc. (NYSE:TREX) is the world’s largest manufacturer of
wood-alternative decking, railing and fencing products. The final product is
made up of recycled wood, wrapped in a plastic covering made from recycled plastic bags. Trex offers railings, flooring, fencing, framing, and lighting
products and sell through wholesale distributors like Lowes or Home Depot.
• Trex has experienced
the third consecutive quarter of double digit earnings growth.
• Earnings per share has
increased 36% as the company continues to implement its efficient cost-saving
efforts.
• Management has given
a guidance of high sales growth and lower costs with a Q3 revenue estimate of
$105 M, a 12% increase from 2015 Q3.
• Trex’s year-over-year
revenue and earnings growth has been steady and shows no sign of slowing down
in the future.
Key
points: Trex is having a magnificent year experiencing a
year-to-date stock price increase of 60.38%. This is due to a combination of
different factors. Earnings per share has increased 36% due to cost-cutting and
efficiency efforts. Revenue is also experiencing strong growth of 7% over Q2 of
last year as Trex exploits its market share opportunities. Lastly, the gross
margin grew 3.5%
Trex is facing
headwinds of low polyethylene costs that are driving down their profits off of
the sale of their recycled polyethylene pellets. This could still be seen as an
opportunity of Trex as they will have another source of revenue when the pellet
price eventually increases. Q2’s increased revenues were based off of their
existing business growth and not a new segment.
The largest driver of
future growth for Trex is the still largely untapped market share opportunity
in North America. Wood represents 84% of the linear feet sold in America.
Although the company is starting to scrape the surface of this opening, they
still have a virtually unlimited room for growth as they show their recycled
boards’ superiority over regular wood boards. They have begun a large marketing
campaign to gain a larger share of this market.
In the Q2 earnings
call, management predicted third quarter’s revenue to be about $105 M, a 12%
increase over last year’s Q3. Their gross margin is expected to continue to
grow from their lower input costs and other cost saving methods that they have
implemented.
What
has the stock done lately?
Over the past quarter,
Trex stock has exploded in value. The Q2 earnings call beat the consensus EPS
of $0.72 by $0.07, instigating a 16% jump in the stock price. They are continuing
to grow from there. They are also continuing their plans of repurchasing stock,
taking on $300,000 in debt to buy back shares. They have 1.6 M shares left in
their plan. In the long-term, Trex has consolidated their railing and poly
operations. They have also acquired land near their Winchester facility for
future needs. They have just recently hit a 52 week high and the momentum does
not seem to be slowing down.
Past
Year Performance: Over the past twelve months, Trex stock
has increased by 64.37% to $61.74. This growth shows that management’s plans
have begun to come to fruition. Their revenue expansion and cost cutting method
are adding up to big margin growth. In a smaller way, their stock repurchase
plan is helping to increase EPS.
Source: FactSet
My
Takeaway
2016 has been a big
year for Trex and their growth does not appear to be slowing at all. Management’s
long term strategies of market share penetration, marketing tactics, and growth
are working stupendously and consistently driving their profits upward. After
this second quarter’s results and the third quarter’s projections, investors
are optimistic towards Trex and their prospective earnings. With the low
polyethylene prices, I expect Trex to have another large boost when
polyethylene prices climb back up. My suggestion for the AIM class of 2017 is
to continue holding Trex as it reaches my projected price of $64.41 and moves
beyond it.
