Trex Post-Earnings Rally Leads The Stock To New Highs

If you’re remodeling a deck at your home (as I was a few years ago), it’s very likely you’ll at least consider using wood-alternative products from Trex NYSE: TREX.  

Trex manufactures wood-alternative products used for decking and other building applications, such as porches, fencing, railings, trim, deck framing and outdoor lighting. 

The distribution is focused on wholesale distributors and retail lumber dealers, which in turn sell Trex products to homeowners and contractors, with an emphasis on professional contractors, remodelers, and homebuilders.

The Virginia-based company has been growing earnings at double-digit rates in each of the past eight quarters, with accelerating growth in the past two. Revenue grew at double-digit rates in seven of the past eight quarters. Revenue growth also accelerated in the most recent two quarters. 

The stock has been trading in a constructive channel formation since gapping up more than 14% on November 9, following the company’s third-quarter earnings report. 

Trex earned $0.64 per share, topping the consensus estimate of $0.59 per share. That’s a 56% increase over year-ago earnings of $0.41 per share a year.  

Revenue came in at $335.87 million for the quarter, beating analysts’ estimates of $326.01 million. That marked a 45% year-over-year increase. 

According to MarketBeat earnings data, Trex has beaten analysts’ revenues views in the past eight quarters. 

Outperforming The S&P 500

With a market capitalization of $15.52 billion Trex qualifies as a large-cap. As such, it’s relevant to compare its performance to the S&P 500. 

Trex is outperforming the S&P 500 this year. The stock is up 60.99 % year-to-date, trouncing the S&P 500 is a wide margin. The index is up 21.75% this year. 

Although the company was profitable and accelerating its earnings growth for several years, the building and remodeling boom that began last year only bolstered Trex’s position in the building industry - along with its stock.  

In a statement accompanying the earnings release, president and CEO Bryan Fairbanks said,  “The accelerated pace of market share conversion from wood to composites continues, and our ability to capture a large portion of this expanded addressable market reflects the strength of our brand and the range of our product portfolio, which supports consumer decision-making by providing a range of product aesthetics, features and price points that have broad appeal and distinct competitive advantages over wood.”

Of course, every company reporting these days is addressing inflation issues in its earnings calls. An analyst asked Fairbanks and other senior managers about progress on gross margin in the fourth quarter. 

“We expect to see some progress there basically because of we'll have a full three months’ worth of our price increase in place,” said chief financial officer Dennis Schemm. 

“Inflation, unfortunately, has not abated at this point,” added Fairbanks. “When we talked last quarter, we had expected things to soften somewhat during the third quarter, it didn't. So we are still working to catch up and I'm confident that we will. And we've taken more price increases this year than last time.” 

Promising Chart Patterns

The stock formed a first-stage after it retreated from a September 13 high of $114.61. It’s categorized as a first-stage base because its structure low of $90.59 undercut the prior base’s structure low of $91.56. 

When that happens, it’s a sign that enough selling has taken place that institutional investors are comfortable backing up the truck and loading up shares at a lower valuation. Of course, if a stock has future potential in terms of earnings, that can result in more buying. 

Trex cleared its base before the earnings report. Since then, it’s been carving out a formation that appears like tight, sideways trade on a weekly chart. On a daily, you can see the trend of higher lows, indicating strong support from buyers, three weeks after the report. That bodes well for future gains. 

At this point, Trex shares are too extended for a buy. However, a pullback with support to a key moving average could offer an opportunity to add shares.