Adding Portfolio Diversity With Trex

May 20, 2022 2:45 PM ETTrex Company, Inc. (TREX)1 Comment3 Likes
Tyler Maryott profile picture
Tyler Maryott
132 Followers

Summary

  • Trex is the largest manufacturer of alternative decking and railing products, known for low maintenance wood alternatives for decking and railing.
  • Products are currently sold in 42 countries outside of U.S. over 6,700 stocking locations.
  • International growth rate of 49% growth YOY and nearly 300% growth since 2015.
  • Trex reaffirmed guidance for full year 2022 incremental EBITDA margin of 30% to 35%.

Partial Construction Of The New Composite Residential Deck

Solidago/iStock via Getty Images

Thesis

Trex (NYSE:TREX) is the largest manufacturer of alternative decking and railing products. Best known for the low maintenance needs, Trex is the top wood alternative to decking and railing. With over 30 years of experience Trex has made quite a name for itself. Trex is rated the number one brand in outdoor living in Forbes' 2021 List of America's Best Mid-Size Companies. Trex currently trades just around a 32 P/E GAAP (TTM) and 25 P/E Non-GAAP (FWD), so the company is still not "cheap" by any measures. Shares are down roughly 54 percent year to date, but up over 280 percent over the past five years. With this said, Trex has a five-year average revenue growth of 19 percent, a 24 percent five-year average EBITDA growth, and (my favorite statistic) five-year average growth of Free Cash Flow Per Share Growth of 26 percent. I strongly believe Trex's long proven track record, environmental focus and sustainability efforts, and future innovations will offer long term rewards at these levels for shareholders. For those who are looking to diversify from a technology heavy portfolio, Trex is a great example of a "growth" stock in a much needed and growing industry.

Full Suite of Outdoor Living Products

Products (May 2022 Investor Presentation )

Background

Trex is known for their outdoor living products, which range in a multitude of offerings, color, and styles. These product options offer reduced maintenance needs when compared to wood products. Notably, Trex is the lead provider for custom railing systems for both the private and commercial markets. Trex, for the 12th consecutive year, was named the "greenest decking" through the industry by Green Builder magazine. Additionally, Trex received the highest score in decking category from the Green Builder Media Brand Index. There are numerous other accolades which will be discussed later in a section about environment and sustainability.

Growth Rates

Growth Statistics (May 2022 Investor Presentation )

To date, products can be found in more than 6,700 separate retail locations spread worldwide including Home Depot (HD) and Lowe's (LOW). Results from the Top builders brand show that the fourth time in 15 years, Trex earned top honors recognition across all measurable criteria for Composite/PVC Decking category and additionally beat every brand in Deck Railing category. What I found the most interesting and compelling is that the company was rated the highest in "Product Quality".

Financials

Trex's Q122 earnings displayed some great numbers. I will address some of the highlights I found impressive. Trex's consolidated net sales increased 38 percent to a total of $339M. Net income was up 47 percent for $71M. Earnings per share on a diluted basis was up 48 percent to $.62. EBITDA came in at 105M for an increase of 49 percentage points. Trex's residential sales increased 40 percent to $327M and commercial came in at $12M for sales. The 40 percent growth in the residential sales was directly attributed to by an increase in both volume and pricing.

Trex Share Price Chart

Trex Share Price (Seeking Alpha )

Trex's pricing actions and increased efficiencies in production aided in offsetting inflation seen in raw materials, labor, and logistics. First quarter of 2022 gross margins for residential was 40.9 percent when compared to 40.2 percent in a year ago period, while commercial was 10.4 percent when compared to 17.2 percent in a year over year period. Something to make note of is related to general and administrative expenses. These numbers came in at $40M when compared to $31M for the first quarter in 2021. The increase was said to be due to higher spend of branding and expenses relation to personnel. CEO, Bryan Fairbanks, said that "40% Revenue growth, reflecting a double-digit increase in volume from strong secular trends, as homeowners continue to invest in existing residences and pursue renovations that enhance their outdoor living spaces." This quote leads me to believe that Trex will continue to remain a key to home remodels moving forward for the next few years.

For future outlooks, the 2022 second quarter out shows that revenues are expected to grow 22 percent with an expected net sales to range from $375M to $385M. The CEO also reaffirmed the full year guidance for EBITDA margin of 30 percent to 35 percent. Additionally, Trex still can purchase 7.2M shares as part of the current repurchase program.

Trex Revenue Growth Via Seeking Alpha

Revenue Growth (Seeking Alpha )

Risks

In addition to a direct wood competition, Trex also shares and competes in the market space with other wood-alternative product manufactures. The most well-known direct competitors are the Azek Company (AZEK) and C.R. Laurence Co. Azek trades at a 25 forward P/E GAAP and has a forward revenue growth of 19 percent. Azek has also beat earnings the last 7 quarters. However, 99 percent of Azek sales were completed in the United States, whereas, Trex offers diversity within the business model by selling across numerous countries. Time will tell which company comes out on top, but with a large addressable market, both companies have room to grow.

Trex often depends on third party business for the needs of transportation. With a supply chain issues and constraints and the recent rise in national fuel costs, an increase in these costs offers potential impacts for Trex. If the situation would worsen or the inability to deliver product should arise, consumer demand could be impacted. Specifically noted in the 10-K, Trex has a significant portion of products, goods, and finished goods in which are transported by flatbed trucks. As previously noted, the higher gas prices, the demand for these trucks will most likely increase the cost of moving goods which could impact the balance sheet of Trex.

A quote I found very interesting within the 10-K relating to inflation is, "Specifically, our efforts would primarily center on increased automation, modernization, enhanced energy efficiency and improvements to raw material processing. To the extent that these actions would not offset the impact of inflation we would seek to increase the price of our products to our customers." Like majority of businesses, inflation is a strong headwind that will remain for the foreseeable future. These are all things to watch and keep on the radar as the year continues and Trex reports Q2 and Q3 earnings for 2022.

ESG

Awards

ESG awards (May 2022 Investor Presentation )

Trex VR is one of the newest pushes from the company into sustainability and innovation. This product allows future or potential buyers to see the products in real time for the potential project spaces. Additionally, Trex has had a long standing goal for educating and engaging the public for recycling, which landed them as one the largest recyclers for polyethylene film bags and packaging in America. From 2011 to 2020 approximately 3.5 million pounds of plastic film was recycled utilizing the programs set forth through Trex.

Trex's NexTrex program currently has more than 32,000 nation-wide locations for collecting recycling. Trex also recently announced a 3rd production sit in Little Rock. The proximity to transportation hubs and raw materials combined with a strong labor market should serve this location for years to come. Warehouse and administrative office construction are set to begin in 2022 with a goal for production mid 2024. Notably, this year's recycling challenge ended in April for the 15th annual challenge. Since 2007, the Trex Plastic Film Recycling Challenge has educated students about upcycling and recycling with involvement from the community. To date, 686 schools participated in the 2021-2022 challenge, and collected a total of 323,586 pounds of polyethylene plastic film.

With a long-standing commitment to sustainability, here is a list of awards and accolades form just 2021:

  • BUILDER magazine's Brand Use Study (composite/PVC decking as well as deck railing category):
  1. #1 in Brand Familiarity
  2. #1 Brand Most Used
  3. #1 Brand Used Most in the Past Two Years
  • Green Builder magazine's "Hot 50 Products" - Trex Signature® Railing
  • Green Builder magazine's Readers' Choice award for "Greenest" decking (11th consecutive year)
  • Green Builder Media's Brand Index - Highest score for the decking category
  • Qualified Remodelers' Choice 100 - Trex® Outdoor Fire & Water™
  • Lifestory Research's America's Most Trusted® survey - Named America's Most Trusted Outdoor Decking Brand receiving the only five-star rating in the decking category
  • FORBES' List of America's Best Mid-Size Companies - Trex Company, Inc ranked #12 overall on this year's list of 100 companies

Final Thoughts

Again, I believe Trex's long proven track record, environmental focus and sustainability efforts, and future innovations will offer long term rewards at these levels for shareholders. Specifically, those who are looking to diversify from a technology heavy portfolio, Trex is a great example of a "growth" stock not in the technology realm. With Strong Q1 earnings results and strong forecasts for full year 2022, I believe buying shares between $50.00 per share and $70.00 per share is a great price to start a position or begin adding to a current position. Time will tell if inflation will serve as a headwind and most importantly, if Trex can continue taking market share from competitors.

This article was written by

Tyler Maryott profile picture
132 Followers
Passionate about investing and teaching about investing. Long term oriented, focusing specifically on Growth Stocks. Cut your losers and let your winners win.
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Disclosure: I/we have a beneficial long position in the shares of TREX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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