Trex Shares Up As Eco-Friendly Flooring Specialist Beats Views

Key Points

• Trex business is on the rebound with double-digit growth after the post-pandemic slowdown.
• Earlier this year, Trex divested its commercial business for $8.25 million, leading to a non-cash loss of $15.4 million.
• Trex' synthetic decks, using recycled materials, appeal to environmentally conscious buyers.
• Analyst ratings show a consensus view of "moderate buy" with a target of $75.80, implying a 4.45% upside.

Even before it beat second-quarter expectations, Trex Company Inc. NYSE: TREX was in rally mode. 

On July 31, the maker of eco-friendly composite decking and outdoor products reported earnings of 71 cents per share, down 10% from a year ago, but topping views, which called for net income of 54 cents a share, as you can see on MarketBeat’s Trex earnings page. 

Revenue of $356.5 million was down 8% from the year-earlier quarter, but also beat Wall Street views. 

There’s another trend going on with the company: Although both revenue and earnings have been lower on a year-over-year basis, the decreases have been narrowing: In recent quarters, the revenue decreases have gone from 44% down to 8%, so that’s an improvement. On the earnings side, decreases have gone from 78% to 10%.

Post-Pandemic Slowdown

It’s not difficult to see what went wrong in the second half of 2022 and the first half of this year. New home purchases and remodeling projects were driving business during the pandemic, as the company notched double-digit sales and earnings increases. 

But, as we all know, high interest rates resulted in a slowdown in new home purchases. Inflation took a bite out of consumer spending, and also put a dent in Trex’s business-to-business sales. 

Earlier this year, the Virginia-based manufacturer sold its commercial business to privately held Sightline Commerical Solutions, LLC for $8.25 million.

However, the divestiture resulted in a non-cash loss of $15.4 million. 

Focusing On Profitable Growth Strategy 

At the time of the sale, Trex CEO Bryan Fairbanks, said, in a statement, that the divestiture reflected the company’s decision to focus on the most profitable growth strategy, which is its outdoor living business segment. 

After a sharp price decline in 2022, along with the broader market, Trex has posted the following returns: 

• One month: 10.10%
• Three months: 29.45%
• Year-to-date: 68.93%
• One-year: 12.47%

Clearly, investors began seeing the potential even as earnings and revenue were on the decline. 

One reason lies in the company’s alignment with environmental trends, which are taking hold. 

Trex’ synthetic decks last longer than wood, and environmentalists are pleased with its products’ uses of materials such as sawdust and recycled plastics. Much like other categories, such as solar energy, which as an industry traded lower last year, Trex is in the sights of big investors who understand the future potential. 

Emphasizing Growth Initiatives

In the second-quarter earnings release, Fairbanks emphasized initiatives to grow the business, including the construction of an Arkansas plant, which when completed, will support the company’s long-term growth strategy. The aim, of course, is to convert more wood buyers to Trex decking and railing. 

He said, “"Trex delivered considerable margin expansion driven by production optimization and fast return cost-saving programs.” He also cited investments in branding programs, and expansion of the company’s decking and railing product portfolio.

MarketBeat’s Trex analyst ratings show a consensus view of “moderate buy” with a $75.80, an upside of 4.45%. 

Analysts Boosting Price Targets

Analyst actions since the earnings report have been outstanding. A total of 12 analysts boosted their targets on the company. 

In addition to its future with appeal to environmentally conscious home buyers, the company has other qualities that make it watchlist-worthy. As inflation cools and interest rates eventually come down, more buyers and remodelers will return. 

Trex’ futures are tied to those of the housing industry, which, as a whole, has been on the rise in recent months. 

Support At 21-Day Moving Average

The Trex chart indicates two cup-with-handle breakouts in a row, with the most recent breakout occurring in late June. Since then, the stock has tread higher along its 21-day moving average, and is currently trading at its best levels since April 2022.

Since gapping up after its earnings report, Trex stock has been getting solid support above its 10-day moving average. The stock could be actionaboe for more aggressive investors, but those with more conservative instincts may want to wait for earnings and sales growth to return.