Trex (NYSE: TREX) is the largest manufacturer of alternative decking and railing products. Best known for its low maintenance needs, Trex is the best wood alternative to decking and railings. With over 30 years of experience, Trex has made quite a name for himself. Trex is ranked the top outdoor living brand in Forbes’ 2021 list of America’s Best Midsize Companies. Trex is currently trading around a 32 P/E GAAP (TTM) and 25 P/E Non-GAAP (FWD), so the company is still not “cheap” by any measure. The shares are down about 54% year-to-date, but have risen more than 280% in the past five years. That said, Trex has a five-year average revenue growth of 19%, a five-year average EBITDA growth of 24%, and (my favorite statistic) a five-year average free cash flow per share growth of 26%. I firmly believe that Trex’s long and proven track record, environmental concern and sustainability efforts, and future innovations will deliver long-term shareholder rewards at these levels. For those looking to diversify from a technology-focused portfolio, Trex is a great example of a “growing” stock in a booming and badly needed industry.
Trex is known for its outdoor products, which come in a multitude of offerings, colors and styles. These product options offer reduced maintenance requirements compared to wood products. Notably, Trex is the leading supplier of custom railing systems for the private and commercial markets. Trex, for the 12th consecutive year, has been named the “greenest deck” in the industry by Green Builder magazine. Additionally, Trex received the highest score in the decking category of the Green Builder Media Brand Index. There are many other rewards which will be covered later in a section on environment and sustainability.
To date, products can be found at over 6,700 outlets worldwide, including Home Depot (HD) and Lowe’s (LOW). The Top Builders brand results show that for the fourth time in 15 years, Trex earned top honors recognition across all measurable criteria for the composite/PVC decking category and additionally beat all brands in the category. patio railings. What I found most interesting and compelling was that the company was rated highest for “product quality”.
Trex’s Q122 revenue posted very strong numbers. I will touch on some of the highlights that I found impressive. Trex’s consolidated net sales increased 38% to a total of $339 million. Net income rose 47% to $71 million. Diluted earnings per share increased 48% to $0.62. EBITDA was 105M for an increase of 49 percentage points. Trex residential sales increased 40% to $327 million and commercial sales reached $12 million. The 40% growth in residential sales was directly attributed to an increase in volume and prices.
Trex’s pricing actions and increased production efficiencies helped offset inflation seen in raw materials, labor and logistics. Gross margins for the first quarter of 2022 for residential were 40.9% compared to 40.2% a year ago, while commercial margins were 10.4% compared to 17.2% year-on-year. one year period. Something to note is related to general and administrative costs. Those numbers come in at $40 million compared to $31 million for the first quarter of 2021. The increase is believed to be due to higher spending on branding and personnel expenses. CEO Bryan Fairbanks said “40% revenue growth, reflecting double-digit volume growth from strong secular trends, as owners continue to invest in existing residences and pursue renovations that improve their outdoor living spaces”. This quote leads me to believe that Trex will continue to be the key to home improvement for years to come.
For the future outlook, the second quarter of 2022 shows that revenues are expected to increase by 22% with expected net sales of between $375 million and $385 million. The CEO also reaffirmed the full year guidance of an EBITDA margin of 30% to 35%. Additionally, Trex can still purchase 7.2 million shares under the current buyback program.
In addition to direct wood competition, Trex also shares and competes in the marketplace with other wood substitute manufacturers. The most well-known direct competitors are The Azek Company (AZEK) and CR Laurence Co. Azek trades at a GAAP P/E of 25 and has forecast revenue growth of 19%. Azek also beat the earnings of the last 7 quarters. However, 99% of Azek’s sales were made in the United States, while Trex offers diversity within the business model by selling in many 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 companies for transportation needs. With supply chain issues and constraints and the recent increase in national fuel costs, an increase in these costs offers potential impacts for Trex. If the situation worsens or if the impossibility of delivering the product occurs, consumer demand could be affected. Specifically noted in the 10-K, Trex has a large share of products, merchandise and finished goods in which are transported by flatbed trucks. As previously discussed, rising gasoline prices and demand for these trucks will most likely increase the cost of transporting goods, which could impact Trex’s balance sheet.
A quote that I found very interesting in the 10-K regarding inflation is: “Specifically, our efforts would be primarily focused on increased automation, modernization, increased energy efficiency, and material processing improvements. To the extent that these actions would not offset the impact of inflation, we would seek to increase the price of our products for our customers.” Like the 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 progresses and Trex releases its second and third quarter results for 2022.
Trex VR is one of the company’s newest pushes toward sustainability and innovation. This product allows future or potential buyers to visualize in real time the products for the potential spaces of the project. Additionally, Trex has a long-standing goal of educating and involving the public in recycling, which has made it one of the largest recyclers of polythene bags and packaging in America. From 2011 to 2020, approximately 3.5 million pounds of plastic film have been recycled using programs implemented by Trex.
Trex’s NexTrex program currently has more than 32,000 locations nationwide for recycling collection. Trex also recently announced a third production site in Little Rock. Proximity to transportation hubs and commodities combined with a vibrant labor market should serve this location for years to come. Construction of warehouses and administrative offices is expected to begin in 2022 with a production target of 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 community involvement. To date, 686 schools have participated in the 2021-2022 challenge and have collected a total of 323,586 pounds of polythene plastic wrap.
With a longstanding commitment to sustainability, here is a list of awards and accolades for 2021 only:
- MANUFACTURER Magazine brand usage study (composite/PVC decking category as well as deck railing):
- #1 in brand awareness
- #1 most used brand
- The #1 most used brand over the past two years
- Green Builder Magazine’s “Hot 50 Products” – Trex Signature® Railing
- Green Builder Magazine Readers’ Choice Award for “Greenest” Deck (11th consecutive year)
- Green Builder Media Brand Index – Top Score for Decking Category
- Qualified Renovators’ 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 Midsize Companies – Trex Company, Inc. ranked 12th overall on this year’s 100 list
Again, I believe Trex’s long and proven track record, focus on the environment and sustainability efforts, and future innovations will deliver long-term rewards at these levels for shareholders. Specifically, for those looking to diversify from a tech-focused portfolio, Trex is a great example of a “growth” stock that isn’t in the tech space. With strong first quarter results and strong guidance for full year 2022, I think buying stocks between $50.00 per share and $70.00 per share is a great price to start a position or start adding to a current position. Time will tell if inflation will serve as a headwind and, more importantly, if Trex can continue to take market share from its competitors.