February 15, 2019 | 1:27 PM by Jay Kunstman | jkunstman@jaguaranalytics.com

Behind The Numbers – Trex Company (TREX)

Jaguar clients are already familiar with this name as we first started covering this stock back in April 2017. But, it’s been a couple months since we’ve talked about it, so I thought I would spend a moment discussing the company’s Q4 results that were issued after the close yesterday.

For those that do not know, Trex is the leading manufacturer of composite decking in North America. It sells its products to approximately 90 wholesale distribution locations, which in turn distribute to over 3,000 retail outlets throughout the U.S. and Canada.

Earnings Results

-EPS of $0.43 vs $0.36 estimate – Beat
-Revenue of $140M vs $131.44M estimate – Beat
-Q4 Consolidated Net Sales increased 15%
-Q4 Residential Products Net Sales increased 11%
-Q4 Commercial Products Net Sales increased 43%
-Q1 Revenue Guidance of $176M vs $189.58M estimate – Miss

CEO Jim Cline, in his prepared remarks, said that they are pleased with the strong finish to a record year, reflecting in the 15% consolidated sales growth which was represented by strong double-digit growth for both international and domestic residential products as well as commercial products. “In residential products, very positive response to our Early Buy Program more than offset lower levels of organic sales as we experienced throughout the quarter as the channel normalized its inventory.”

He would also add, Demand was strong supporting our new product introductions and advanced ordering ahead of the January 2019 price increase on certain decking products. This is our first meaningful price increase on decking since 2011. The decision to take the price increase was due primarily to increased cost for freight and non-recycled raw materials that were experienced throughout much of 2018 and are expected to continue into 2019.”

Seaport Global analyst Matt McCall would reiterate his Buy Rating and $90 price target saying Trex reported Q4:18 EPS of $0.43, beating consensus of $0.36. “While a few primary guidance items provided for either Q1:19 or FY19 appear “disappointing” on the surface, we are encouraged across the board. Moreover, elevated inventory should be reviewed while keeping in mind management’s commentary around new wins.”

Near-Term Pain / Long-Term Gain

Management would talk about the introduction of their new Enhance product, which is designed to put pressure on treated lumber with enhanced basic solid color products targeting the value-conscious buyer. CEO Jim Cline would remind investors that as discussed in the Q3 call, the new Enhance products have enabled them to significantly expand their stocking positions in 2019, which will not only lead to further expansion of market share but also enable customers to accelerate the conversion from wood at a more profitable level. Also, data shows positive trends for its flagship Transcend product line during the Early Buy season, supporting what they have learned through extensive market research in advance of our new Enhance product launches, namely that these products are expanding the market for Trex products. “We expect this new line of products will have a significantly positive impact on sales and earnings in 2019 and beyond.”

However, Stifel analyst John Baugh would point out in their note last night that Q1 total sales are expected to increase only 3% Y/Y to $176M. He noted that there was some pre-buy in the 4th quarter ahead of the announced January 1 price increase as well as the transition to the new Enhance products which will delay some sales beginning in Q2. Introducing the products are creating startup costs, which are expected to impact gross margin in Q1 and to a lesser extent in Q2 before gross margin rises in the back half. But, once the new Enhance products are for sale, Stifel believes this will create incremental demand, which they estimate to be about $80 to $100 million, over time.

Finally, B. Riley FBR analyst Alex Rygiel was out raising their price target for Trex Company to $80 from $71 citing greater confidence of re-accelerating growth in the second half of 2019 and beyond. The analyst recommends buying the stock on the weakness that may be caused by a modest reduction to the company’s first half of 2019 earnings outlook. New product introductions are negatively impacting margin in the first half of the year, but should reinvigorate growth in the second half and beyond.

#TREX

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