Sunday, September 11, 2016

Update of Trex Company Inc. (Ticker: TREX) by Michael Robinson, AIM Student."This Wood Alternative Decking Firm Worthy of a Closer Look"

Trex Company Inc. (TREX, $61.89): “Trex Boards Nail It”
By: Michael Robinson, AIM Student at Marquette University

Image result for trex co inc logo

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 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.