Ben's avatar
$17.7m follower assets
Trex
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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.
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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

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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.

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  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!

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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.

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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.

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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.

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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.
Pat Connolly's avatar
$TREX is great. I want to believe that with enough scale Trex could one day be cheaper to install than wood. Trex is a unique building material as it's really not (immediately) effected by new housing starts -- 95% of sales are for remodel/renovation.

Gabriel Kaplan's avatar
@pat_connolly I don't dispute that argument. What I'm saying is that demand was driven by cash out refinancing and that has dried up. CEO thinks drawdown will impact the next 2 quarters. That is the consensus view. I'm not willing to take that bet. NTM P/E 33.9x of a company that is negatively impacted by higher rates is expensive.
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Pat Connolly's avatar
@strategicinvestors yeah I’m with you on the idea that right now is not the right time. Trex is a discretionary upgrade for home improvement projects that are typically discretionary themselves.
Ben's avatar
@strategicinvestors why do you think demand was driven by cash out refinancing? Was this happening for the last decade? Or just last year?
Gabriel Kaplan's avatar
@rpinvestments The link between cash out refinance and contractor work is well known but I can't find nice graphs for you. =)

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Freddie Mac publishes some data.
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Ben's avatar
@strategicinvestors I do love graphs. But trex has grown when refinancing was high (last 2 years) AND when cash out refinanced where low (2009-2019). That is the point to make

In fact trex revenue grew more in 2018 when refinancing was depressed than in 2019 and 2020 when refinancing where on the rise
Gabriel Kaplan's avatar
@rpinvestments and it will continue to grow, no doubt. It is a great product. The question I'm asking myself. Is this the best time to invest in $TREX. Ultimately, I think there is additional downside risk because a lot of the growth in the past two years came from refinance cash outs. I think the CEO knows this but I don't think the market has fully internalized this information. Let's follow up on this conversation in 6 months.
Ben's avatar
@strategicinvestors that I agree with. Next 6 months will be tough for trex and there may be a better entry point
Invested Thought's avatar
Love $TREX, intrigued by current prices but waiting to understand more of the cyclical aspects of the business before getting involved. I had no idea they were responsible for 10% of all plastic recycled in the US!
Ben's avatar
@investedthought I know! Trex management highlights the amount of plastic they recycle every year. But without knowing a comparison of all plastic recycled in the US, it’s hard to understand the magnitude
Dividend Dollars's avatar
Wowza, that’s a serious margin they’ve got! Really cool that they use 95% recycled materials
Ben's avatar
@dividenddollars very cool. My favorite part of business.
Dissecting the Markets's avatar
$TREX is underrated. If lumber prices grow at an absurd level, I say long Trex.
Ben's avatar
@dissectmarkets we are already there
Gabriel Kaplan's avatar
Great company and I do think it should be on everyone's radar.
Expensive right now given the environment.
Likely will face difficult couple of years while mortgage rates adjust upwards. A significant amount of retail business was driven by low rate refinancing (cash out).
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Ben's avatar
@strategicinvestors I saw a lot of these same things where written about trex in ‘08-‘09. The business and the stock has done well since then. It’s BC of the short term headwinds that you can buy such a great business for its lowest multiples in a decade. Sure timing the bottom of this correction would be ideal. Ring the bell for me when that happens
Giuliano's avatar
Thanks for bringing this one up, didn't know it!
Ben's avatar
@giuliano_mana you’re welcome
Jeff's avatar
Nice write up. Seems solid. I wonder if azek is also a buy here at basically same revenue ttm and half the market cap. Looks like Trex has better operating margins though. My family member in this space says they are both excellent products.
Ben's avatar
@jkess54 $AZEK deserves the lower multiple. It’s inferior to trex in every major financial category. Worse margins, low ROE and ROI, 600 mil debt for Azek vs none for trex, no free cash flow over last 3 years, not decreasing share count
SLT Research's avatar
Very interesting Ben, great pick. Really like the fact that the company uses 95% of recycled materials especially when it benefits the bottom line too. Of course there are short term headwinds and the company is more expensive than Azek, but when we compare both profitability profiles, a premium appears to be justified.
Ben's avatar
@slt_research I agree. Couldn’t have said it better
Josh Kohn-Lindquist's avatar
Man I really love $TREX — excellent submission Ben 👍

Beautiful thing when good for society businesses offer outperforming potential for shareholders.

This valuation only speeds up my urgency to buy more for my daughter and I. Likes seeing the timing of their buybacks as well.
Ben's avatar
@joryko thanks for the kind review. I’ll be sharing my $TREX trades also over the coming months
Jaron's avatar
i like this Idea. And by the way my firts green flag a lame website https://uk.trex.com/our-company/investor-relations/
Ben's avatar
@jaroncorleone haha. Just like Berkshire Hathaway
Joshua Simka's avatar
@jaroncorleone Their US site is a little more robust :) https://www.trex.com/
Makes sense given they operate mainly in the American market

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