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).
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:
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%.
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
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
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.