Trex (NYSE: TREX) is Under-the-Radar Play on Homebuilding Boom

The homebuilding sector, you may have heard, has been one of the biggest winners of the pandemic. The Fed is expected to keep its benchmark short-term interest rate near zero until at least 2023, which means that sub-3% mortgage rates are likely here to stay for a long time. Home prices are at record highs as there isn’t enough supply to absorb all of the remote workers that are moving to the suburbs.

There are the obvious plays on the homebuilding boom – names like DR Horton NYSE: DHI, Toll Brothers NYSE: TOL, and Lennar NYSE: LEN. You should consider getting direct exposure to homebuilders.

But thinking outside the box and looking for an indirect play can be rewarding. “During a gold rush, sell shovels” is a saying that has stood the test of time. For good reason.

Trex Deserves a Look

 Trex NYSE: TREX manufactures wood-alternative decking products. Shares have more than 25x’ed over the past 10 years, but many people have still never heard of the company. Trex, however, looks poised to continue growing and get on more people’s radars.

Why Wood Alternatives?

You may be wondering: why would people want a wood-alternative desk instead of a lumber deck?

Trex’s boards, it turns out, can last for 25 years, more than twice as long as pressure-treated lumber lasts. The company makes its boards by starting with cheap sawdust and combining it with polypropylene and a few other ingredients. The wood-alternative boards are often more expensive than lumber boards up-front, but cheaper in the long-run.

Trex is Growing at Double-Digit Rates

Trex’s first nine months of 2020 have been excellent:

• Consolidated net sales of $653 million are up 12% yoy.
• Net income of $132 million is up 21% yoy.
• EBITDA of $188 million is up 23% yoy.

The company is going to face tougher comps in 2021, but still expects another year of double-digit growth. “This positive outlook reflects a combination of the strength of the outdoor living category, our brand leadership and our product line-up that allows us to compete effectively from the entry-level to premium level decking and railing products. We continue to be excited about the significant conversion opportunity from wood to Trex products.”

That conversion opportunity from wood to Trex products can drive strong growth for many years to come.

Wood-Alternative Market Has Massive Growth Potential

According to Azek NYSE: AZEK, one of Trex’s top competitors, 78% of decks built in the US in 2019 were wood. That number was down from 80% in 2018. This is great news for two reasons:

1. A shift from lumber to wood-alternative decks is underway.
2. That shift is still in its early stages.

It’s impossible to say when wood-alternatives will stop taking market share from lumber. But whether it gains 20% more share or 60% more share, we’re talking about a sizeable long-term opportunity.

Trex Has Pandemic-Related Tailwinds

As touched on earlier, the proliferation of remote work has pushed many people to move to the suburbs. Those people are spending a lot of time in their new homes and want to be comfortable. Which means having, among other things, a restful outdoor space. A nice deck is often the answer.

Money is tight for many people at the moment, however, so wouldn’t they be more likely to turn to lumber boards instead of wood-alternative boards? Not when you consider the low-interest rates. They aren’t just low for mortgages, but also for home equity loans.

Being able to borrow money at such low rates allows people to take a long view. Wood alternatives look good when you consider the long-term ROI.

Trex is prepared for the current and future demand, saying, “We continue to execute on our capacity expansion, which once completed will increase Trex's decking capacity by approximately 70%.”

How Should You Play Trex?

Trex shares have nearly doubled YTD, and set all-time highs last week. Shares are down around 4% this week, however, so a pullback may be underway.

Trex has a lot of long-term momentum, so it’s hard to imagine that this pullback will last for long. The deck manufacturer has a lot working in its favor, and looks like the type of company that can grow for longer than you expect. There will be more pullbacks, but long-term, the arrow is pointing up on Trex.