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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.

Ben's avatar
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