Trex Company: The Bottom Is In (Rating Upgrade)

seekingalpha11-04

With numerous headwinds in the rearview, market sentiment is improving for Trex Company.Trex has 3 tailwinds: growth in Restore & Remodel, a new opportunity in railing, and growth in FCF.At $70, Trex ...

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James Pintar  It's been nearly a year since I last covered Trex (NYSE:TREX). Since then, shares ran from $60 to $100, then back to $60. As of this writing, the stock is trading near $70. Investors have had quite the ride. The company announced Q3 2024 results on October 28 and the market responded favorably, sending shares up 6% for the day. After listening to the earnings call, I think the bottom is in for Trex, and I am upgrading my rating from HOLD to BUY. Trex has some tailwinds at its back. And with the Fed easing on interest rates, I believe there's a strong likelihood shares head higher over the coming year. Here are my key takeaways from Trex's Q3 2024 results. Data by YCharts Back to Growth in Repair & Remodel Trex experienced tremendous tailwinds during COVID when lockdowns, coupled with government stimulus, pulled forward a ton of demand in home Repair and Remodeling (R&R). From early 2020 to late 2021, shares ran from a low of $28 to a high of $141; that's a 5x return. But as lockdowns eased and inflation increased, the demand for Trex's products slowed considerably. No longer trapped in homes, consumers elected to spend their disposable income elsewhere. Then, rampant inflation made disposable income not so disposable. Over that period, Trex's topline revenue decreased 8% in 2022 and 1% in 2023. These are the only years Trex has seen a YoY decrease in revenue over the past decade. Today, Trex believes the R&R market is poised for growth in 2025, forecasting an increase in the low-to-mid single digits. Historically, Trex outperforms the R&R market considerably, which implies it too is poised for growth next year. $3.3 Billion Opportunity in Railing On October 22, Trex announced a plethora of new products in the decking, fastener, and railing categories. I'm excited about the new products and features in decking (like heat mitigation technology) where Trex is already the market leader. But I'm more excited about the opportunity in railing. Per Trex, railing represents a $3.3 billion opportunity in a market that's highly fragmented. With only 6% of current market share, Trex still holds a podium spot as market leader. The company is forecasting to double its market share to 12% within the next 5 years. This implies railing will account for approximately $400 million in annual revenue, which represents 40% of Trex's current revenue near $1 billion. The company is already seeing acceptance by key distributors, who are pleased to offer an all-in-one solution. Trex recently announced Snavely Forest Products will offer Trex railing exclusively across its nationwide distribution network. Trex also hinted at other exclusive partnerships which will be announced soon. Free Cash Flow Growth after Arkansas In 2020, Trex began investing heavily in its Arkansas facility, which will increase its production capacity to $2 billion annually. Trex's current revenue is $1.1 billion. The facility isn't expected to come online until early 2027. The Arkansas facility represents an investment of $500+ million, of which Trex has already spent $340 million or 70%. The increase in capital spending has weighed on the company's free cash flow (FCF). The project will be substantially complete by 2026 with annual capital expenditures expected to return to historical norms. This will increase FCF and free up capital for share repurchases and, possibly, a dividend. Also, I believe a higher than usual Price-to-FCF (P/FCF) ratio has weighed on market sentiment. Trex doesn't screen well from a valuation perspective because P/FCF has been 50+ the past 3 or 4 years. Valuation At $70, I don't think shares are cheap. But I do believe Trex represents growth at a reasonable price (GARP). With most of the headwinds in the rearview, I don't think Trex trades much lower from here. The easing of interest rates helps sentiment a ton. Trex is currently trading at a >15% discount to nearly all historical valuation ratios such as P/E, EV/EBITDA, and P/S. On the conservative side, this implies a fair value of approximately $80 which seems reasonable.   TREX Historical Valuation Multiples (Seeking Alpha) Bear Case I think the bear case for Trex hinges on macroeconomics. If inflation stagnates or refuses to decrease, even with interest rate cuts, that'll weigh on shares. Consumers will continue delaying home renovation projects, which may send the R&R market back into deceleration mode. The past several quarters, Trex indicated strength in its premium products, but weakness in its entry-level products. This indicates the lower income consumer is getting squeezed while higher income consumers are doing okay.  With a continued deterioration in macros, there must be a point where even higher end consumers pull back on discretionary spend. I think it's a low risk but a risk, nonetheless.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2480472513"}