TREX

TREX Co.

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-$63.54 -58.37%
Ben's avatar
$17.8m follower assets
Trex
Overview
$TREX makes composite decking, railing and other related outdoor products. They use 95% recycled material to make their composite decking.

Trex checks off every box I look for in a company. They have sustainable growth in a market with a large TAM. Management is excellent at capital allocation and enjoy best in class margins. Trex has also been ESG since before ESG was a movement.

Competition
Trex’s largest competitor is wood decking.

Trex was founded in 1996. By 1999 composite decking was just 3% of the decking market.

Trex has 2 main competitors in the composite decking market, AZEK and Fiberon (part of Fortune Brands). AZEK is the larger competition with similar TTM revenue to Trex. Fiberon is much smaller with 1/10 the revenue.

Competitive Advantages
Why do customers choose Trex over other composites or wood? On the last earnings call CEO Bryan Fairbanks mentioned looks, cost, maintenance, and environmental impact.

  1. Looks

Can you tell me which of these pictures is wood decking and which is Trex decking? Earlier generation composite decking had a less than natural wood look. Newer Trex composites are more natural looking. All the pictures above are Trex except the bottom right.

  1. Cost

Cost used to be a huge driver leaning people to buy wood decking because composite decks could be twice as expensive on average up front. However with rising lumbar costs and higher lifetime maintenance cost, Trex only costs 10-20% more at 5 years.

  1. Maintenance

Composite decking is lower maintenance. No yearly staining or sealing. Composites also don’t rot, fade or splinter.

  1. Environment Sustainability

Lastly is something that’s very important to me. And I’m not alone, 40% of consumers want to be more environmentally friendly with their purchases according to a Boston Consulting Group survey. Trex uses 95% recycled materials, namely plastic film and sawdust. They kept 400 million lbs of plastic out of landfills last year alone. In fact 10% of all plastic recycled in the US last year was by Trex!

Using recycled material isn’t just to check an ESG box, it is Trex’s competitive advantage. Because their inputs are waste, they enjoy higher margins than its competitors. Trex’s gross margins are 8-10% higher than Azek. Azek uses more expensive PVC plastic inputs.

Management
Capital allocation has been excellent. While Trex’s stock traded for a premium during much of the last 5 years, management only bought 200 million worth of stock. Instead using 220 million of its cash flow on capex to expand into a 3rd manufacturing facility and 70 million on an acquisition of a deck railing company. Then in the last 6 months, they used more on buybacks than in the previous 5 years combined totaling 248 million. This aggressive buyback happened while the stock’s PE traded in 20s. They where able to decrease share count by 3.7% in 2 quarters.

This excellent capital allocation is reflected in their industry leading ROE and ROI which is 40 and 34, respectively.

They are continually working on cost structure. Improving operating margins by 3% over the last 5 years despite all the recent shipping and manufacturing headwinds.

Financials
  • 1.3 billion in TTM revenue
  • 39.5% gross margin and 28.5% op margins.
  • No long term debt
  • 31.9% 5 year free cash growth
  • 22% 5 year CAGR revenue growth

Growth Projections
Azek and Trex make up about 2/3 of the composite decking market. This market is projected to grow at 11-14.5% CAGR for the next 5-10 years. I think this is conservative as historically Trex has grown at 22% CAGR. And this was at a time when the US was under building new starts.

Approximately 25% of new houses comes with a deck. As the US catches up on a decade of under building, a fourth of these homes will come with decks.

But also a common upgrade of existing houses is to add a deck. With 85% of mortgages under 5% and many locked into sub 3% mortgages rates, I think people will lean into home improvement and upgrades over moving which will be a tailwind for home improvement stocks like TREX.

Discussion/Valuation
  • PE 20
  • EV/EBIT 13
  • P/cash flow 16

Current short term headwinds with channel partners over-supplied led to decreased second half revenue guide by 300 million. Stock is down 66% from its highs. I see this a buying opportunity to add a long term compounder as they continue to take market share away from wood.
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Ben's avatar
$17.8m follower assets
Aug Update
Pretty slow Aug. didn’t add much new cash.
Had that month where everything in your house breaks. Lightning strike, AC repairs, rock through the window.

Sells:none

Plan for the end of year. If markets keep giving me sales I’ll keep adding to the above names. Also plan on initiating a new position in $TREX at some point.
If markets go up, I’ll slow buying and build a cash pile for the next market down turn. Currently less than 1% cash.
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4 Growth Stocks I'll Be Adding To
I touched base on four of my favorite publicly-traded growth companies out there right now in my most recent Motley Fool article.

Two are more hypergrowth style, and two are steady-Eddie types with fair prices -- all are down around 40% to 65% YTD.


A one-sentence takeaway for each:

  • $SOFI - Building the rails for fintechs (neobanks) to operate on while building a broader consumer-facing (banking) flywheel.
  • $TREX - Feel-good, sustainable decking products, matched with a great valuation (PE of 21) and a history of stomping the market.
  • $YETI - Unaided brand awareness continues rising, cult-like following persists amongst its fans, and a PE of only 17.
  • $GLBE - Landed $DIS as a partner to help expand their global DTC sales -- an incredibly positive sign for Global-e's future and hopefully a harbinger of things to come.
Which company posts the best returns through 2032?
28%SoFi
9%Trex
23%Yeti
38%Global-e Online
21 VotesPoll ended on: 09/02/22
Tough choices. Big fan of $YETI as a company. Lean employee numbers give it top notch margins. Excellent management gives it >50% ROE and so far solid capital management, paying down debt when it’s stock is overpriced and bought back shares decisively once it dipped over 50%, completing total buy back program in 1 quarter.
$TREX will likely be the next new add for me. Been wanting to buy for 3+ years but just couldn’t when it’s PE was 40-60. But with a PE of 21 and a big revenue guidance downward. I think in the next 6 months will be a great time to be a long term share holder.
Global -E has been on my watch list since IPO. Love financial middlemen. Still watching. Do you worry about there recent 10x increase in SGA to maintain its revenue growth. SGA 9, 11, 19 million for 2018, 19, 20 (about 10% of revenue). This jumped to 126 million in 2021, 51% of revenue.
Banks are too depend on the fed for their cost of capital. I’ll likely never own a bank.
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Help With a New Watchlist Position
With the market turning red today, it's time to start a new watchlist position.

I've found four businesses that fascinate me and will inevitably join my portfolio in time -- but I struggle with knowing when to add them.

So I will turn to the great community here and see who you all like and start a tiny watchlist position in the winner of the following poll.

I intend to hold this watchlist position forever (theoretically) to keep track of them and will gradually add to them over time (such as $TREX's addition today).

Thank you, friendly humans, and feel free to say why you like your pick if one of them catches your attention.
Which stock should I start a watchlist position in for the long term?
21%Okta
9%Stanley Black & Decker
30%Lululemon
38%AMD
42 VotesPoll ended on: 08/12/22
Top Losers Today @ 11am
Visit highsandlows.substack.com to see more
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