Trex Company Inc. (TREX, $132.49): “No Splinters in This Trex”
By: Michael
O’Donnell, AIM Student at Marquette University
Summary
• 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.
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.
