Trex Co. (TREX 77.25, +13.14, +20.50%) is trading higher after reporting Q2 results last
night. Trex is an interesting company so we wanted to take a closer look at
what they do and see how the Q2 results went. Trex is the world's largest
manufacturer of wood-alternative decking and railing.
By combining reclaimed wood fibers and scrap polyethylene, Trex believes its products have an advantage over wood in that warping, splitting, and moisture damage won’t occur.
Trex's strategy has been to expand into other product categories and to outgrow the industry by gaining share compared to wood and other composite products. Wood accounts for 80+% of industry sales but hasn’t seen a ton of growth. The company has also been making manufacturing process improvements. Trex Commercial Products is performing to plan, winning new projects and maintaining a solid backlog heading into 2H18.
In July 2017, Trex acquired SC Company, the market leader in modular and architectural railing systems for the commercial and multi-family markets. This deal provided Trex with access to growing commercial markets and it added the contract architect and specifier communities as new channels for Trex. SC Company forms the core of its Trex Commercial Products unit.
Turning to the Q2 results, EPS rose 49% to $0.73, which was a good bit better than market expectations. Revenue rose 30.9% year/year to $206.7 mln, well above prior guidance of ~ $191 mln. Trex also guided for Q3 revenue at ~$173 mln, which is well ahead of market expectations. Trex Residential Products sales in Q2 were up 20% to $189 mln, with Trex Commercial Products contributing an additional $17 mln.
Trex says its Residential Products led the way with a substantial year/year revenue increase, reflecting a high level of consumer engagement. Its channel partners continue to execute and meet the increasing demand for Trex Residential Products and have adapted their supply chain management practices to accelerate purchases to overcome a tight freight market. Trex was also pleased with the progress of Trex Commercial Products, as revenue increased 9%, in-line with internal expectations. Trex feels it's well positioned to meet expected demand from a capacity standpoint for the foreseeable future.
In sum, this was another nice quarter for Trex as it shows they are taking market share as consumers become more familiar with the benefits of non-wood decking options. Selling prices are higher than wood, but consumers usually make up the difference over the life of the deck as maintenance costs are much cheaper. The stock has been in a steady uptrend since early 2016 when it was trading around $18, it's now around $64, both on a split-adjusted basis (there was a 2-for-1 stock split in June 2018).
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