Is Trex Stock Still a Good Buy?

FAN Editor

Trex Company (NYSE: TREX) is the leading manufacturer of wood alternative decking and railings, manufactured mainly from recycled wood and plastics. The company has regularly beat analysts’ estimates, and its stock has rewarded long-term investors with an over 1,000% return since 2012.

However, when the company projected lower-than-expected growth rates and shrinking margins for the first half of 2019, the stock dropped on worries that growth may be slowing. Is Trex still a good buy, or has the opportunity for investors passed?

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The concerns

While the company once again beat analysts’ estimates last quarter, there was significant concern about projections for the coming year. The company is estimating lower than normal growth rates, in the range of just 3%, for the first quarter of 2019. That’s way down from the 18% and 10% annual growth Trex delivered in the opening quarters of 2018 and 2017, respectively. Management is also projecting tightening margins for the first half of 2019, below the 43% level from last year. Combined with rising inventories, these developments have many investors concerned about Trex’s future growth potential.

Management stated in their conference call that all of these headwinds were related to the introduction of three new product lines, including premium decking offerings, at the end of 2018. Growth will slow temporarily as older product line moves through the distribution pipeline before newer products take their place. This will also impact margins and inventory levels. But management expects sales to pick up in the second half of 2019, which has traditionally been the strongest season for the company as weather improves, and more customers are looking to build or replace decks. As inventory levels stabilize and sales of new products increase, the company expects margins to expand to 45%.

The opportunities

Trex is moving aggressively into the Do-It-Yourself (DIY) market, which makes up 59% of all decks built. Traditionally, a low-cost focused market, the company is working to promote their products long-term durability and low-maintenance needs that make it a superior product to wood. Trex has also started to promote their online resources to help the DIY user to make the correct product choices, develop deck plans, and find a local retailer from which to purchase the materials.

For 2019, the company’s new decking lines employ a tiered pricing strategy to meet different needs and material requirements. Starting with a basic standard option, the new product lines also include mid-priced selections and a premium line with more patterns, colors, and options. The pricing on the tiers start at about twice that of comparable wood decking, but the company makes the case that over the long term, the product will be less expensive, last longer, and be easier to maintain than wood.

Meanwhile, the recently formed Trex commercial products (TCP) division is focused on industrial railing for stadiums and buildings. While this segment made up just 10.4% of the company’s top line last year, its revenue jumped to $71 million from $22 million the prior year (Trex acquired its commercial business in July 2017). All six stadiums nominated for Sports Facility of the Year in 2018 used TCP railing. A short list of projects includes USBank Stadium, Penn State, Madison Square Garden, and Cowboys Stadium. The market for industrial railings is estimated by the company to be in the range of $1 billion, and TCP is well positioned for long-term growth in this area.

Lastly, the company is targeting international growth in higher GDP markets. Right now, Trex is focused primarily on the European market, but it has distributors in South America, Asia, and Africa. The company projects that international growth will outpace the U.S. in the coming years, and it plans to take a strategic approach to expanding sales overseas.

So is Trex still a buy?

The company has strong financials with $106 million in cash on hand and no debt. It also generated $84 million in free cash flow last year, which means it can fund growth without going into debt. Analysts project revenue to grow 10%-plus annually over the next five years, and the company has a forward price-to-earnings ratio of 30 times at the time of this writing — not necessarily a bargain, but the stock is attractively valued for those with a long-term outlook that stretches beyond just a few quarters.

With a market cap of only $4 billion, I believe this stock still has plenty of room left to grow. And despite the short-term headwinds, the future growth potential is significant enough to make this stock a buy.

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Louis Brooks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Trex. The Motley Fool has a disclosure policy.

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