In perhaps another sign that the housing sector is slowing
down, Trex Co. (TREX 52.66, -5.45, -9.38%) is trading lower after reporting Q3 results last night.
Trex is the world's largest manufacturer of wood-alternative decking and railing. A majority of its products, which are offered in a wide selection of sizes, lengths, and colors, are made using a proprietary process that combines reclaimed wood fibers and scrap polyethylene.
Trex products offer a number of aesthetic advantages over wood while eliminating many of wood's major disadvantages, including tendencies to warp, split, or take other damage from moisture. TREX's products, which are reportedly less costly than wood over the life of a deck, are resistant to that moisture damage, and they also require no staining and provide a splinter-free surface. These features result in a lower-maintenance deck. Trex aims to strategically outgrow the industry by gaining share (both versus wood, which still accounts for 80%+ of industry sales, and versus other composite products) and expand into other product categories.
In July 2017, Trex acquired SC Company, a 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 added contract architect and specifier communities as new channels for Trex. SC Company now forms the core of the Trex Commercial Products unit.
Turning to the Q3 results, non-GAAP EPS rose 68% year/year to $0.57/share, which was better than market expectations. However, revenue rose just 18.7% year/year to $166.4 mln, which was a good bit below prior guidance of approximately $173 mln. Trex Residential Products sales were up 12% to $147 mln while Trex Commercial Products contributed an additional $19 mln. As for guidance, Trex expects Q4 revenue to come in around $131 mln, which is below market expectations.
The Residential Products segment continued to benefit from strong customer demand and brand leadership. TREX was able to expand gross margin in the segment as ongoing manufacturing cost savings programs, lower recycled polyethylene input costs, and higher utilization more than offset increased freight and other raw material inflation.
On the call, TREX said that channel checks have confirmed that professional and consumer demand has continued to experience strong double-digit growth among repair and remodeling customers in North America throughout October. Also, the Residential segment has historically correlated with consumer confidence and remodeling growth.
At the same time, high-performance composite decking is becoming the material of choice among homeowners and professional contractors and is increasingly recognized for its ability to enhance residential resale values. Website traffic trends and marketing analytics indicate that Trex's consumer engagement programs are resonating with its target customer. Building on its success in gaining market share, Trex expects the conversion from wood to composite to continue to accelerate in 2019.
While Trex sounds pretty optimistic about its Q3 results and its outlook for Q4 and 2019, the revenue in Q3 and the revenue guidance for Q4 did not live up to market expectations. The stock has already been falling sharply in recent weeks on fears of rising interest rates. The stock traveled from $90 in early September to close yesterday at $58.11, and it's trading down even more today. Investors are going to want to see some improvement in guidance in early 2019.
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