Story Stocks^®

Trex (TREX) reported its Q4 report last night. The numbers for this supplier of wood-alternative decking and railing did not blow us away with modest beats on EPS and revs. Investors tend to not put a lot of importance on Trex's Q4 numbers because it is a seasonally slow period and the lowest revenue quarter each year. Few people are building new decks in the fall/winter. What investors are focusing on is Trex's 2024 outlook, which is quite good.

• Quickly on Q4, growth was fueled by increased volume and the absence of the residual channel inventory destocking seen in the prior year period. Results also reflected strong demand for Trex products heading into 2024. Trex noted that channel sell-through remained at mid-single-digit levels in Q4 and channel inventories ended the year at historically low levels. Gross margin at 36.1% was flat yr/yr but above internal expectations.
• Trex issued huge upside revenue guidance for Q1 at $360-370 mln, inclusive of $60-80 mln from its early-buy program. Analysts may not have realized that Trex shifted its early-buy program from December to this year's Q1.
• In terms of full year 2024, Trex sounded pretty positive. Trex expects a strong year with double-digit revenue and EBITDA growth based on several factors. First, 2024 will benefit from the early-buy program shifting into Q1. Second, Trex expects mid-single digit underlying demand growth despite its expectations of the larger Repair & Remodel market being flat to down low single digits in 2024. Third, channel stocking behaviors are normalizing with yearend decking inventories down 15% from the prior year lows.
• Trex also sounds positive about its Trex Signature and Trex Transcend Lineage products, two recently launched lines targeting the higher-end consumer. Lineage offers a proprietary heat mitigation technology and a more refined, clean look. Lineage has quickly gained traction in both the pro channel and special order category at its Home Center partners. Trex is planning a national rollout for Signature decking, which is competing well at the high end of the market.

Overall, this was a good report for Trex. The focus was not so much on the Q4 results, but more on the 2024 outlook which was quite positive despite some macro pressures. With inflation, higher rates and with consumers cutting back on discretionary purchases, we think investors are pleased with Trex's double-digit revenue growth forecast and its mid-single digit underlying demand forecast.

Many homeowners are staying put and not wanting to relinquish their low mortgage rates. So instead of buying a new home, many consumers are instead improving their outdoor space while adding value to their home. On a final note, Trex guided to 2024 adjusted EBITDA margin of 30.0-30.5%, so this is a good margins business.