TREX my ‘outside of the box’ holding

Investment Analysis Clubs Saul’s Investing Discussions
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I primarily look for and invest in companies operating in the black with top-notch business plans (preferably easy to understand for lay people), highly competent management, strong balance sheets, strong capital structures, and positive steady growth in ROIC, FCF, margins and revenue, among other considerations, that enable these companies to substantially outperform the S&P 500 and/or other indices. This is why I introduced to this board my “outside of the Saul box” holdings like Align Technology (ALGN) back on 5/8/17 and GrubHub (GRUB) back on 5/19/15 that have superbly outperformed the S&P 500 like the ‘inside the Saul box’ super-growth in revenue companies, pursued and favored here.

Today, I present another of my ‘outside of the box’ holdings -Trex Company (TREX) - that over the recent past several years has realized strong fundamentals, created substantial value for its shareholders and experienced increasing growth in annual revenues (almost at Saul’s “at least 20% per year” that Trex management projects will soar higher than 20%), net income and EPS that I believe merit mentioning here.

The following Big Chart shows my ‘outside of the box’ holdings - ALGN, GRUB and TREX - superbly outperforming the S&P 500 over the recent past 52-week period and tracking between the higher Nutanix (NTNX) and the lower Shopify (SHOP).
http://bigcharts.marketwatch.com/advchart/frames/frames.asp?..

Bottom-line, there are ‘outside of the box’ roads as well leading to Rome.

Ant/anthonyms mentioned in a past post here that he and I have intertwined investing history, e.g., the former EMC Corporation, Dell Technologies (DVMT), NetApp (NTAP), Align Technology (ALGN), GrubHub (GRUB) and Trex Co. (TREX). Ant, are you still holding TREX?

TREX COMPANY BUSINESS

Trex Company, Inc. is the world’s largest manufacturer of wood-alternative decking and railing products, which are marketed under the brand name Trex® and manufactured in the United States, and a leading national provider of custom-engineered railing systems and one of the leading suppliers of staging equipment.

Operations and Products

Trex Company, Inc. currently operates in two reportable segments: Trex Residential Products and Trex Commercial Products.

Trex Residential Products is the world’s largest manufacturer of high-performance composite decking and railing products. Trex offers a comprehensive set of aesthetically appealing and durable, low-maintenance product offerings in the decking, railing, fencing, trim, steel deck framing, and outdoor lighting categories. A majority of the products are eco-friendly and made in a proprietary process that combines reclaimed wood fibers and recycled polyethylene film. Trex Residential products are sold to distributors and two national retailers - Home Depot and Lowe’s - who, in turn, sell primarily to the residential market.

In July 2017, Trex management decided to expand into the commercial and multi-family products business with the $71.5 million acquisition (through cash on hand and its revolving credit line) of SC Company, which is the market leader in the design, engineering and marketing of modular and architectural railing systems and solutions for the commercial and multifamily markets and is a leading provider of staging, acoustical and seating systems for commercial markets, including sports stadiums and performing arts venues. This brand new business became the Trex Commercial Products segment.

For an informative overview, here’s the latest May 2018 TREX INVESTOR PRESENTATION:
https://trexcompanyinc.gcs-web.com/static-files/41ce2918-525…

CORPORATE FINANCIALS

Over the recent past 52-week period, the TREX stock price has soared 100.6% from a low of $64.66/share to a new high of $129.75 last Friday on 6/8/2018.

	
MARKET CAP     $ 3.8 B	
Employees	 1,120
	
52-WK HIGH	129.75
PRICE 6/8/18	129.28
52-WK LOW	 64.66
	
EV/EBITDA (mrq)	 20.12
P/E	         40.15
Fwd P/E	         27.05
EV/Sales (ttm)	  5.67
P/S (ttm)	  6.33

Reflecting the company’s positive outlook, Trex Board of Directors has approved a 2-for-1 stock split of the Company’s common shares. The stock split will be in the form of a stock dividend to be distributed on June 18, 2018 to shareholders of record on May 23, 2018. 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.

Revenue, Net Income and Earnings


**REVENUE   YoY	  NET INCOME    YoY        EPS       YoY**
**FY/QTR	  ($ M)	  Change     ($ M)    Change  ($)diluted   Change**
						
Q1 ‘18   171.207   18.2%    37.110    32.8%       1.25	    31.6%
						
**FY '17	 565.153   17.8%    95.128    40.2%       3.22	    40.6%**
						
Q4 ‘17	 122.212   28.2%    18.299    44.9%       0.62	    44.2%
Q3 ‘17	 140.194   32.0%    20.098   158.1%       0.68     161.5%
Q2 ‘17	 157.941    7.8%    28.782    21.3%       0.97	    21.3%
Q1 ‘17	 144.806   10.0%    27.949    17.9%       0.95	    18.8%
						
**FY '16	 479.616    8.8%    67.847    41.1%       2.29	    50.7%**
					
Q4 ‘16	  95.322	    12.629	          0.43	
Q3 ‘16	 106.168	     7.787	          0.26	
Q2 ‘16	 146.450	    23.725	          0.80	
Q1 ‘16	 131.676	    23.706	          0.80	
						
**FY '15	 440.804   12.5%    48.098    15.8%       1.52	    19.7%**
**FY '14	 391.660   14.3%    41.521    20.0%       1.27	    25.7%**
**FY '13	 342.511	    34.598	          1.01**

What really stands out in the above table are the substantially large positive YoY % changes in net income and earnings, annually and quarterly, that significantly outpace their respective annual and quarterly sales growth.

In FY 2017, total sales increased almost 18%, reaching $565 million, of which 13% represented growth within the company’s legacy business, the Trex Residential Products segment. The remaining 5% growth reflects the results of its 2017 acquisition of SC Company that became the Trex Commercial Products segment. Trex was able to expand its gross profit margin through continued manufacturing cost savings, lower input costs and higher capacity utilization. As a result, Trex delivered $3.22 of diluted earnings per share in 2017, a 41% increase over 2016, which considerably outpaced sales growth.

While some of the gross margin expansion was due to lower scrap polyethylene prices, the vast majority of it was a product of operating leverage and recent projects to improve production processes and drive operating leverage even higher. CEO James Cline reported: Fast-return projects to streamline production processes and reduce our input costs have methodically reduced manufacturing costs, while sales growth has driven increased capacity utilization, combining to drive significant operating leverage. CFO Bryan Fairbanks pointed out that we expects to continue seeing gains here and we expect to continue to see the benefits from our ongoing manufacturing cost efficiencies and from increased capacity utilization as we scale the business.

For the second quarter of 2018, CEO Cline projected, we expect consolidated net sales of $191 million, comprised of approximately $174 million from Trex Residential Products and $17 million from Trex Commercial Products. This will represent a year-on-year growth of 10% for Residential and 21% on a consolidated basis. 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%.

Margins

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.


**MARGINS   GROSS  OPERATING   PROFIT**
			
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. As of 6/8/18, Trex is creating 31.9 cents of pure economic value add (EVA) for every dollar invested.


**ROIC	   WACC	    EVA**
			
6/8/18    45.5%	  13.6%   31.9%
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 good FCF.

			
**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

Capital Structure
Trex maintains a solid capital structure as shown in the following table.

	
Cash (mrq)	         $ 2.7 M
Working Capital	        $ 86.269 M
Total Debt (mrq) 	$ 84.5 M
Total Equity (mrq)     $ 261.86 M
Total Capitalization   $ 346.36 M
LT Debt/Equity	          32.2%
Debt/Capitalization	  24.4%
Current Ratio (mrq)	   1.76

Stock-based Compensation

SBC/revenue ratios are favorably low.


**FY/QTR	  SBC	SBC/Revenue**
	($ M)	
		
Q1 ‘18	  2.30	  1.3%
		
FY 2017   5.19	  0.9%
FY 2016	  4.79	  1.0%
FY 2015	  4.86	  1.1%
FY 2014	  4.81	  1.2%
FY 2013	  3.81	  1.1%

=================================

TREX GROWTH STRATEGIES

The following growth strategies were given by President & CEO James Cline in his FY 2017 letter to shareholders:

“Our future plans include further investments in building the Trex brand, research and development, new and innovative decking and railing products, introduction of new manufacturing technologies, driving further operational improvements and continued focus on the use of low cost recycled raw material streams.
Gaining market share from wood will be a key driver of organic growth. We have grown over the last five years at a rate greater than the average market and we expect to continue to expand our share within composites and against wood as we go forward. Based on market research by Principia Partners, the composite segment of the decking industry is predicted to grow at a faster rate than traditional wood. Trex is well positioned to take advantage of this shift away from wood.
Related to manufacturing improvements, we completed testing of the first phase of numerous improvements to our decking lines that will provide a step-change in the manufacturing process and will significantly improve our line throughput. In the first quarter of 2018, we began to implement production line enhancements and we expect to complete this phase by the end of the year. This retrofit not only provides a material expansion to our decking capacity, but also drives cost savings beginning in the second half of 2018. This is the type of high-return, high- impact initiative that our operations and research and development teams are focused on to propel our business forward.”

TREX is a keeper in my portfolio as it continues to fire all cylinders on a growth-oriented course with ongoing manufacturing cost efficiencies and increasing capacity utilization.

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

Regards,
Ray

41 Likes
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I have looked into TREX. Obviously I should have bought some. Conventional wood decking requires lots of maintenance and is unlikely to last much longer than your roof. Though more expensive initially, composites are cheaper long run.
proprietary process that combines reclaimed wood fibers and recycled polyethylene film wow that should appeal to lots of folks

But does TREX have any moat? Or is it just a commodity?

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Trex, AZEK, Fiberon, TimberTech are top brands. There is no moat to speak of.

The quality and duration of the life of materials has a lot to do with who is installing and under which conditions.

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Mausee96: But does TREX have any moat?

Foolintheopen: Trex, AZEK, Fiberon, TimberTech are top brands. There is no moat to speak of.
————————————————————-

Morningstar gives TREX a Narrow Moat rating.
[Background:The Morningstar rating for its Quantitative Economic Moat is expressed as Narrow, Wide, or None.
Narrow – assigned when the probability of a stock receiving a “Wide Moat” rating by an analyst is greater than 70% but less than 99%.
Wide – assigned when the probability of a stock receiving a “Wide Moat” rating by an analyst is greater than 99%.
None – assigned when the probability of an analyst receiving a “Wide Moat” rating by an analyst is less than 70%.]

Regarding competition, in the FY 2017 10K report page 7, TREX states:

• Our primary competition for our wood-alternative decking and residential railing products consists of wood products, which constitutes a substantial majority of decking and railing sales, as measured by linear feet of lumber.

• In addition to wood, we also compete with other manufacturers of wood-alternative products. Industry studies indicate that we have the leading market share of the wood-alternative segment of the decking and railing market. Our principal competitors include Advanced Environmental Recycling Technologies, Inc., The Azek Company, and Fiberon, LLC.. [my emphasis in bold]

• Our primary competition for our staging and railing products in the commercial and multi-family markets consists of companies that provide components to assemble guard rails, including C.R. Laurence Co., Inc., a CRH Group company, regional railing and metal fabrication, and Wenger Corporation.

BTW, AZEK acquired Timber Tech in August 2012.

Here’s the complete competition text from the TREX FY2017 10K report:
Competition
Our primary competition for our wood-alternative decking and residential railing products consists of wood products, which constitutes a substantial majority of decking and railing sales, as measured by linear feet of lumber. Many of the conventional lumber suppliers with which we compete have established ties to the building and construction industry and have well-accepted products. A majority of the lumber used in wood decks is pressure-treated lumber. Southern yellow pine and fir have a porosity that readily allows the chemicals used in the pressure treating process to be absorbed. The same porosity makes southern yellow pine susceptible to absorbing moisture, which causes the lumber to warp, crack, splinter and expel fasteners. In addition to pine and fir, other segments of wood material for decking include redwood, cedar and tropical hardwoods, such as ipe, teak and mahogany. These products are often significantly more expensive than pressure-treated lumber, but do not eliminate many of the disadvantages of other wood products.

In addition to wood, we also compete with other manufacturers of wood-alternative products. Industry studies indicate that we have the leading market share of the wood-alternative segment of the decking and railing market. Our principal competitors include Advanced Environmental Recycling Technologies, Inc., The Azek Company, and Fiberon, LLC.

Our ability to compete depends, in part, on a number of factors outside our control, including the ability of our competitors to develop new wood-alternative decking and railing products that are competitive with our products. We believe that the principal competitive factors in the decking and railing market include product quality, price, aesthetics, maintenance cost, and distribution and brand strength. We believe we compete favorably with respect to these factors. We believe that our products offer aesthetic and cost advantages over the life of a deck when compared to other types of decking and railing materials. Although a contractor-installed deck built with Trex products using a pressure-treated wood substructure generally costs more than a deck made entirely from pressure-treated wood, Trex products are low maintenance compared to the on-going maintenance required for a pressure-treated deck and are, therefore, less costly over the life of the deck. We believe that our manufacturing process and utilization of relatively low-cost raw material sources provide us with a competitive cost advantage relative to other manufacturers of wood-alternative decking and railing products. The scale of our operations also confers cost efficiencies in manufacturing, sales and marketing.

Our primary competition for our staging and railing products in the commercial and multi-family markets consists of companies that provide components to assemble guard rails, including C.R. Laurence Co., Inc., a CRH Group company, regional railing and metal fabrication, and Wenger Corporation. Our ability to compete depends on our product design advantages, relationships with architects and general contractors, and competitive manufacturing costs.

Regards,
Ray

4 Likes
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Dead right! TREX is an investment. A company with all the necessary figures and a big part of my pf. Such a relief to find an orchid in the field of weeds.

2 Likes
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What a great summary Ray. I really like how you’ve done the financial section (I’m going to copy it for my own summaries!).

WRT to moats, my personal theory is it can be quite hard to identify exactly what makes a moat. In the text-book cases like Coca-cola, it’s sort of easy (although Coca-cola is much more than Coke the product), but the whole supply chain, brand-recognition, sales channels, revenue structures etc, ie, the business, defines the moat.

re: Trex as an investment, do you think its a good investment at this price? Is the growth you’ve outlined priced in?

As you’ve pointed out, the share price has increased markedly over the last year.

Again, thanks for the great summary

cheers
Greg

1 Like
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Great write-up, Ray; a model for all of us to aspire to.

Trex has been on my mind lately, because as I retired builder, I am quite familiar with their products. Just recently I have noticed several well-produced TV commercials for their competitor, Azec. Azec claim to be the number one alternative-to-wood decking supplier, and their range of colors and options is impressive, indeed.

On my last two forays into both Home Depot and Lowe’s, I couldn’t help but notice the prominent - and impressive - displays for Azec decking, and the lackluster promo for Trex. All this raised raised my curiosity and caused me to wonder if Trex has lost it leadership status in this niche building space.

It’s possible that Azec is exaggerating their claim to be number one in the space. After all, it seems every company claims to be something that isn’t possible if any of its competitors claims are also true. Since we are in the age of anything goes for corporations, the FTC obviously doesn’t care if companies claim to do or be something that they are not. Still, it seems that Azec has made substantial inroads into this niche and are definitely out to take business from Trex if they haven’t already.

This would not mean that Trex is not an excellent candidate for investment dollars, it may be. But it certainly makes me want to find out who is selling what and of course, how much.

The swelling ranks of retired Boomers obviously want reduced maintenance products in their new (last) homes, and can afford upgrades, so the market is there for the foreseeable future.

Given what I consider to be a very low barrier to entry, my question is who is going to meet that demand, or is the demand going to be split among several competitors?

Once again, kudos to you for your excellent presentation and formatting. It should be a template for the board and for all good investors willing to share information on new investing candidates. Well done. I suspect the result to be much more significant than had you asked, “Hey, what do you guys think of Trex?” (Then again, maybe I’m just being picky.) :grin:

Not. It makes all the difference.

Dan

3 Likes
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I have a question and it may be a little different but here goes:

Does anyone on here have a TREX or any other kind of faux wood deck and if so, what has their experience been with it? Good, bad, PITA, defects, installation problems or concerns about the longevity of product.

I’m asking to know these companies better…their products that is.

Lucky Dog

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I have a deck made of Trex, or some other plastic lumber, in northern Michigan. It has been up for a few years and so far has held up well.

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I too have a Trex deck for several years now - no issues.

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Composite decking is not without problems

https://gambrick.com/problems-with-trex-decking/#:~:text=Man….
https://www.youtube.com/watch?v=ahiI6WTumB8.

I replaced my 25 year old neglected deck last year, and used pressure treated pine. The composite material plus labor would have cost a lot more. And the extra is paid up front. Money has a time value. What I saved was used to buy stocks that have gone up a lot.