BUSINESS
Trex Company, Inc. manufactures and distributes decking, railing, and outdoor living products and accessories for residential and commercial markets in the United States. The company operates in two segments, Trex Residential and Trex Commercial. It offers decking products under the names Trex Transcend, Trex Select, and Trex Enhance for protection against fading, staining, mold, and scratching; Trex Hideaway, a hidden fastening system; and Trex DeckLighting, a LED dimmable deck lighting for use on posts, floors, and steps. The company also provides Trex Transcend Railing products that are used in Trex decking products and other decking materials; Trex Select Railing products for a simple clean finished look; Trex Enhance Railing system; and Trex Signature aluminum railing for a contemporary look.
INVESTMENT RATING
TREX’s future returns on capital are forecasted to be above the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.
Trex has a current Value Trend Rating of C (Neutral).
This rating combines very contradictory signals from two proprietary PTR measures of a stock’s attractiveness. Trex has a very low Appreciation Score of 11 but a very high Power Rating of 89, leading to the Neutral Value Trend Rating.
Trex’s stock is selling significantly above targeted value. The current stock price of $94.86 compares to targeted value 12 months forward of $43.
Trex’s very low appreciation potential results in an appreciation score of 11 (89% of the universe has greater appreciation potential.)
Trex has a Power Rating of 89. (This very high Power Rating indicates that Trex has a better chance of achieving attractive investment performance over the near to intermediate term than all but 11% of companies in the universe.)
Factors contributing to this very high Power Rating include: recent price action has been extremely favorable; and earnings estimate behavior for Trex has been slightly favorable recently. An offsetting factor is the Lumber & Wood Products, Excluding Furniture comparison group is in a slightly weakened position currently.
INVESTMENT PROFILE
Trex’s financial strength is exceptional. Financial strength rating is 97.
Relative to the S&P 500 Composite, Trex Co Inc has significant Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that TREX is lower risk. High stock price volatility is a relative weakness for Trex. Trex’s valuation is high: low dividend yield, high P/E ratio, and high price/book ratio. TREX has unusually low market capitalization.
CURRENT SIGNALS
Trex’s current operations are stable. Return on equity is falling, reflecting: falling asset utilization; and falling tax keep rate.
Trex’s current technical position is very strong. The stock price is in a 4.0 month up move. The stock has appreciated 72.8% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
Slight positive changes in fundamentals have recently occurred for Trex Co Inc (NYSE: TREX): significant quarterly earnings acceleration occurred.
In light of this new information we are reviewing our current Overall Rating of C. This review will be completed in the next several days.
Trex Co Inc (NYSE: TREX) has reported earnings for its fourth fiscal quarter (ending December 31) of $0.20 versus $0.09 for the same period a year ago — an increase of 122%. This result exceeded the consensus estimate of $0.19 by $0.01. For the latest four quarters through December 31, E.P.S. were $1.89 versus $1.65 for the same period a year ago — an increase of 15%.
Trex Co Inc (NYSE: TREX) stock increased 1.1% on 2/26/24. The shares closed at $94.86. Moreover, trading volume in this advance was unusually high at 162% of normal. The stock has been exceptionally strong relative to the market over the last nine months and has risen 4.7% during the last week.
CASH FLOW
In 2022, Trex experienced a very significant reduction in cash of -$128.7 million (-91%). Sources of cash were much lower than uses. Cash generated from 2022 EBITDA totaled +$312.6 million. Non-operating uses consumed -$21.5 million (-7% of EBITDA). Cash taxes consumed -$38.0 million (-12% of EBITDA). Re-investment in the business amounted to -$208.7 million (-67% of EBITDA). On a net basis, debt investors furnished +$218.1 million (+70% of EBITDA) while equity investors received -$391.3 million (-125% of EBITDA).
Trex’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Trex Peer Group as well. In most years, Trex was in the second quartile and lower quartile. Currently, Trex is substantially below median at -7% of EBITDA (-$21.5 million).
Trex’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Trex Peer Group. (Since 2016 Cash Taxes, %EBITDA has experienced sharp improvement.) In most years, Trex was in the third quartile and top quartile. Currently, Trex is upper quartile at -12% of EBITDA (-$38.0 million).
Trex’s Business Re-investment, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Trex Peer Group. In most years, Trex was in the lower quartile and third quartile. Currently, Trex is lower quartile at -67% of EBITDA (-$208.7 million).
Trex’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Trex Peer Group. (Since 2020 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Trex was in the third quartile and top quartile. Currently, Trex is upper quartile at +70% of EBITDA (+$218.1 million).
Trex’s Equity Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Trex Peer Group. (Since 2020 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Trex was in the top quartile and third quartile. Currently, Trex is lower quartile at -125% of EBITDA (-$391.3 million).
Trex’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Trex Peer Group. In most years, Trex was in the third quartile and second quartile. Currently, Trex is lower quartile at -41% of EBITDA (-$128.7 million).
Trex’s Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Trex Peer Group. (Since 2019 Cash, %Revenue has experienced a very sharp decline.) In most years, Trex was in the lower quartile and third quartile. Currently, Trex is lower quartile at +1%.
PROFITABILITY
Trex’s return on equity has eroded significantly since 2013. The current level of 28.0% is at the low for the period and is -13.8% from the high.
This significant erosion was due to very small positive trend in pretax operating return offset by strong negative trend in non-operating factors.
The productivity of Trex’s assets declined over the full period 2013-2023: asset turnover has suffered a very strong overall downtrend.
Trex’s pretax margin enjoyed a very strong overall uptrend over the period 2013-2023.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
Trex’s return on equity is at median (28.0%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is slightly below median (26.1%) reflecting asset turnover that is below median (1.09X) and at median pretax margin (23.8%).
Tax “keep” rate (income tax management) is lower quartile (74.4%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is at median (1.44X).
GROWTH RATES
There are no significant differences between Trex’s longer term growth and growth in recent years.
Trex’s historical income statement growth and balance sheet growth have diverged. Revenue growth has fallen short of asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been 12.4% per year. (More recently it has been 15.8%.)
Total asset growth has been 20.6% per year. (More recently it has been 25.5%.)
Annual E.P.S. growth has been 19.9% per year. (More recently it has been 10.3%.)
Equity growth has been 23.3% per year.
Trex’s consensus growth rate forecast (average of Wall Street analysts) is 15.1% — below the average of the historical growth measures.
Relative to the Trex Peer Group, Trex’s historical growth measures are generally top quartile. Equity growth (23.3%) has been upper quartile. Total asset growth (20.6%) has been at the upper quartile. E.P.S. growth (19.9%) has been at the upper quartile. Revenue growth (12.4%) has been above median.
Consistent with this pattern, consensus growth forecast (15.1%) is also at the upper quartile.
PRICE HISTORY
Over the full time period, Trex’s stock price performance has been variable and exceptional. Between April, 2013 and February, 2024, Trex’s stock price rose +1459%; relative to the market, this was a +391% gain. Significant price moves during the period: 1) December, 2021 – December, 2022: -69%; 2) March, 2020 – December, 2021: +237%; and 3) September, 2015 – August, 2018: +408%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 54.6% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through January, 2024 of 54.6% is upper quartile relative to Trex Co Inc Peer Group.
Current 5-year total return performance of 18.5% is upper quartile relative to the S&P 500 Composite.
Through January, 2024, with upper quartile current 5-year total return of 18.5% relative to S&P 500 Composite, Trex’s total return performance is upper quartile relative to Trex Co Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, TREX’s overall valuation is exceptionally high. All five factors are upper quartile. The highest factor is the ratio of enterprise value/assets, followed by the price/equity ratio, then by the ratio of enterprise value/revenue, then by the price/earnings ratio. The lowest factor is the ratio of enterprise value/earnings before interest and taxes.
Relative to Trex Peer Group, TREX’s overall valuation is exceptionally high. Four of five factors are upper quartile. The highest factor is the ratio of enterprise value/revenue, followed by the ratio of enterprise value/assets, then by the price/earnings ratio, then by the ratio of enterprise value/earnings before interest and taxes. The lowest factor, price/equity ratio, is at the upper quartile.
Trex has a major value gap compared to the median valuation. For TREX to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 9.52X to 4.42X. If TREX’s ratio of enterprise value/revenue were to fall to 4.42X, its stock price would be lower by $-51 to $44.
For TREX to fall to lower quartile valuation relative to the Trex Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 9.52X to 3.10X. If TREX’s ratio of enterprise value/revenue were to fall to 3.10X, its stock price would decline by $-65 from the current level of $95.
VALUE TARGETS
TREX’s future returns on capital are forecasted to be above the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.
Trex’s current Price Target of $42 represents a -56% change from the current price of $94.86.
Trex’s very low appreciation potential results in an appreciation score of 11 (89% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 11, the high Power Rating of 89 results in an Value Trend Rating of C.
Trex’s current Price Target is $42 (+7% from the 2022 Target of $39 but -56% from the 02/26/24 price of $94.86). This slight rise in the Target is the result of a +16% increase in the equity base and a -7% decrease in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a large positive impact as well. More than offsetting these Drivers, the forecasted decline in growth has a very large negative impact.
PTR’s return on equity forecast is 38.0% — above our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2014 and 2022. The current forecast is significantly below the 2016 peak of 50%.
PTR’s growth forecast is 13.0% — significantly below our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2018 and 2022. The current forecast is well above the 2018 low of 6%.
PTR’s cost of equity forecast is 14.3% — in line with recent levels. Forecasted cost of equity suffered a dramatic, steady increase between 2014 and 2022. The current forecast is above the 2014 low of 10.6%.
At Trex’s current price of $94.86, investors are placing a positive value of $82 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 24.0% per year, and a return on equity of 33.7% versus a cost of equity of 15.6%.
PTR’s 2024 Price Target of $42 is based on these forecasts and reflects an estimated value of existing assets of $33 and a value of future investments of $9.
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