TREX another huge one day price spiker

Last week Tuesday 7/24/18, I was wowed by the market’s reaction to the release of outstanding results for Q2 by Grubhub that in one day drove my GRUB investments up almost 24%. Exactly one week later on the day after releasing outstanding Q2 results, my TREX holdings spiked up almost 23% to a 52-week high of $78.71/share on heavy trading 4.27 times normal volume. A quick check for any of my other holdings reporting next week Tuesday shows nothing, so this is a short-lived streak.

For background info, here’s my first post that brought Trex Company Inc (TREX) to the attention of this board on 6/11/18 (note: the financials given in that post were prior to the 2 for 1 stock split, effective 6/18/18):…

Revenue, Net Income and Earnings

**REVENUE   YoY	  NET INCOME    YoY        EPS       YoY**
**FY/QTR	  ($ M)	  Change     ($ M)    Change  ($)diluted   Change**

**Q2 ‘18   206.692   30.9%    42.820    48.8%       0.73	    49%**						
Q1 ‘18   171.207   18.2%    37.110    32.8%       0.63	    31%
**FY '17	 565.153   17.8%    95.128    40.2%       1.61	    40%**
Q4 ‘17	 122.212   28.2%    18.299    44.9%       0.31	    44%
Q3 ‘17	 140.194   32.0%    20.098   158.1%       0.34     161%
Q2 ‘17	 157.941    7.8%    28.782    21.3%       0.49	    21%
Q1 ‘17	 144.806   10.0%    27.949    17.9%       0.475	    19%
**FY '16	 479.616    8.8%    67.847    41.1%       1.15	    51%**
Q4 ‘16	  95.322	    12.629	          0.215	
Q3 ‘16	 106.168	     7.787	          0.13	
Q2 ‘16	 146.450	    23.725	          0.40	
Q1 ‘16	 131.676	    23.706	          0.40	
**FY '15	 440.804   12.5%    48.098    15.8%       0.76	    19%**
**FY '14	 391.660   14.3%    41.521    20.0%       0.64	    26%**
**FY '13	 342.511	    34.598	          0.51**	

Here are the highlights from the above table:

• Trex continues to realize substantially large positive YoY % changes in net income and earnings, annually and quarterly, that significantly outpace their respective annual and quarterly sales growth.

• Consolidated net sales for the Q2 2018 were $207 million, a 31% YOY increase. Trex Residential Products net sales were up 20% to $189 million, with Trex Commercial Products contributing an additional $17 million. SG&A was $34 million, or 16.2% of sales. Exclusive of $1.2 million in amortization of intangibles associated with the acquisition of SC Company, SG&A was 15.6% of sales.

CEO Cline commented: Our channel partners are reporting positive point of sales data along with higher lumber prices, specifically for cedar and redwood, which have further enhanced Trex value proposition. Given the strong demand that we’re seeing, we expect the 2018 data will show conversion from wood, increasing by 1 percentage point in a single year, a milestone that took 2 years to achieve in prior years. As a point of reference, a one percentage point conversion from wood equals approximately 50 million in sales for composites and we believe as the category leader, Trex is gaining a greater portion of these incremental sales.

• Net income for the Q2 2018 was $43 million, or $0.73 per diluted share, both up 49% from the net income of $29 million, or $0.49 per diluted share reported for last year’s second quarter.

It appears that TREX is on a strong growth trend in annual and quarterly revenue along with its exceptional growth in annual and quarterly net income and earnings.

Corporate Financial Guidance for Q3 2018 and FY 2018

CEO Cline stated: “For the third quarter of 2018, we expect consolidated net sales of $173 million, comprised of $154 million from Trex Residential Products, representing 18% organic growth and $19 million from Trex Commercial Products. Our projected effective tax rate for the year remains at approximately 25%. We forecast our full year 2018 incremental margin to remain at approximately 45% to 50%.”


All margins are realizing significant increases as the company plans to further drive down manufacturing costs and increase throughput from the residential decking business, while also improving the profitability of the new commercial products segment.

Consolidated gross margin for the Q2 2018 was 44.1%. Trex Residential Products gross margin expanded 30 basis points to 45.9%. As anticipated, Trex Commercial Products gross margin showed significant sequential improvement to 24.6%.

A major portion of the 1/30/18 earnings call addressed gross margins as follows:

CEO Cline: We continue to leverage the significant engineering talent of our commercial segment to bring attractive new railing designs to our residential portfolio, which have come to market in record time and have been received well by our retail and trade consumers. Both Trex residential and commercial products reported improved gross margin in the second quarter. In residential, this means year-over-year expansion, thanks to the same factors that have resulted in margin growth in prior quarters, namely our lower raw material costs, resulting in part from our ability to identify, qualify and procure new lower cost recycling product streams, manufacturing efficiencies, which are part of an ongoing program and higher capacity utilization.
These factors drove higher gross margin comparisons in the second quarter, despite additional expenses related to the major improvements to our production lines that are underway to significantly increase throughput by the end of this year, increased product innovation costs and higher freight costs.
In commercial, we saw a substantial sequential improvement in gross margin, driven by improved execution and cost reduction initiatives. We continue to execute a number of process improvements and high return capital improvement projects that will not only allow us to improve our quality of the products, but will also allow us to improve our margins in the second half of this year.

CFO commented: Consolidated gross margin in the second quarter was 44.1% compared to 45.6% reported in the second quarter of 2017, reflecting the impact of lower gross margin profile of Trex commercial products. Trex residential products gross margin expanded by 30 basis points to 45.9% due to the sustained benefits of lower polyethylene material costs due in large part to product substitutions along with manufacturing efficiencies and higher capacity utilization. The benefits were partially offset with additional expenses related to the improvements to our production lines that are underway to significantly increase throughput, increased product innovation costs and higher freight costs.


Q2 '18    44.1%    27.9%     20.72%		
Q1 ‘18	  44.8%    27.9%      21.7%
FY 2017   43.1%	   25.2%      16.8%
FY 2016	  39.0%	   21.7%      14.2%
FY 2015	  35.1%	   17.6%      10.9%
FY 2014	  35.8%	   17.3%      10.6%
FY 2013	  28.7%	    7.2%      10.1%

Return on Invested Capital (ROIC)-Weighted Average Cost of Capital (WACC) Spreads

Trex has realized substantial growth in ROIC and ROIC-WACC spreads. For Q2 2018, Trex is creating 39 cents of pure economic value add (EVA) for every dollar invested.

**ROIC	   WACC	    EVA**
Q2 '18    53.3%	  13.9%   39.3%
Q1 '18	  54.8%	  13.4%   41.5%
FY 2017   60.4%	  14.1%	  46.3%
FY 2016	  58.9%	  15.2%	  43.7%
FY 2015	  43.8%	  18.2%	  25.7%
FY 2014	  40.7%	  18.3%	  22.4%
FY 2013	  35.5%	  16.0%	  19.5%

Free Cash Flow
Trex continues to maintain strong FCF.

FY 2017	  $ 86.83 M		
FY 2016	  $ 70.74 M		
FY 2015	  $ 39.30 M		
FY 2014	  $ 45.87 M		
FY 2013	  & 32.15 M		



                     7/31/18    6/8/18(a)
MARKET CAP          $ 4.57 B   $ 3.8 B	
Employees	       1,120     1,120
52-WK HIGH	       78.71     64.87
PRICE   	       77.74     64.64
52-WK LOW	       32.39     32.33
EV/EBITDA (mrq)	       24.34     20.12
P/E	               44.17     40.15
Fwd P/E	               32.39     27.05
EV/Sales (ttm)	        6.86      5.67
P/S (ttm)	        7.73      6.33

PRICE Y-T-D change     43.4%
PRICE 52-week change  100.9%
S&P 500 52-week change 13.2%

Note (a): Adjustments made to reflect the company’s a 2-for-1 stock split of the Company’s common shares, effective 6/18/18. Additionally, in the 2018 first quarter, Trex repurchased 50,000 common shares for a total expenditure of $5 million as part of its share buyback program approved by the Board of Directors in February 2018.

Over the recent 52-week period, the TREX stock price has soared 100.9% from $38.69 (8/1/2017 closing price) to $77.74 (7/31/18 closing). Y-T-D Trex is up 43%.

The following Big Chart shows TREX superbly outperforming the S&P 500 over the recent past 52-week period and tracking between higher NTNX and SHOP, two board favorites.


For now, TREX provides diversity and is a long-term investment in my family’s portfolios as this company continues on its growth-oriented course and provides strong performance versus the S&P 500 and other other popular investments here.

For those interested, here are some findings from Putnid’s TA “Tricks of the Trade” referenced websites as of 7/26/18.

100% BUY - Current Strength: top 1%; Current Direction strongest.

Summary: BUY
Moving Averages: STRONG BUY

Grade: A

Overall: 60% NEUTRAL…

For TA experts

As always, conduct your own due diligence and decision-making.