Last month, Trex Co. enticed homeowners cooped up during the pandemic with the siren song of sunshine and al fresco dining.
“Does staying inside have you yearning for the outside?” the maker of wood-plastic composite decking asked restless recluses in a Facebook post. “Us, too.”
The bait of fresh air appears to be working. Requests for product samples and designs picked up considerably since an April lull, Chief Executive Officer Bryan Fairbanks said. Like RH, the company is expected by analysts to be a beneficiary of the pandemic-fueled home improvement craze as residents remodel, a sector that accounts for the majority of demand for Trex.
“The outdoor living theme is resonating with consumers,” Jefferies analyst Philip Ng said in an interview.
Shares of Trex, which sells products crafted from 50% recycled polyethylene and 50% reclaimed wood, hit a record $128 in late May, more than doubling from a March low. So far this year, the stock has gained about 33%.
Trex’s product appeals to homeowners tired of sanding, staining and stepping on the occasional splinter. The company manufactures composite decking and railing sold at retailers including Lowe’s Cos. and Home Depot Inc. as well as lumberyards. The Winchester, Virginia-based company also has a commercial segment, but it’s the residential business that drives sales, contributing the most to revenue last year.
Fairbanks, 51, took the helm in late April after working at Trex for more than 15 years, most recently as financial chief. He’s CEO at a pivotal point, as homeowners have had downtime to ponder how to beautify their backyards and as the company adds capacity to plants in Nevada and Virginia.
Demand for home remodeling and repair is improving by the day, said Benchmark analyst Reuben Garner, who pumped up his price target to a Street-high matching $136 this week. Meanwhile, Google searches for “Trex decking” are at all-time highs, he added.
“We believe that this is evidence consumers are increasingly looking to make investments in their homes,” he said Thursday in an email. “Trex is the most recognizable consumer brand in the composite decking space, and the product is more ‘DIY’ in nature than I think most investors may realize.”
Trex aims to capture a larger slice of the decking and railing market. The company estimates that as of 2019, composites like those made by Trex only account for about 20% by volume. For Trex, that means the lion’s share of the decking and railing market is ripe for conversion. Their strategy: go after wood.
This market opportunity is “the biggest part of the story,” Berenberg analyst Alex Maroccia said in an interview.
Last year, Trex launched its re-engineered Enhance Basics and Naturals collection, the company’s most affordable offering. Jefferies’ Ng said that’s a big positive as the lower maintenance and more durable nature of composites was already a draw, but the price was a sticking point.
Trex is the largest player in composite decking by market share. The company competes with Azek Co. and Fiberon, which is owned by Fortune Brands Home & Security Inc. Azek, the second-largest player in the industry, made its public debut last week.
Some differentiating factors between Trex and Azek include margins and debt, according to Berenberg’s Maroccia. Azek’s TimberTech decks use less recycled content than Trex’s products, and that lower proportion results in more expensive raw materials, the analyst wrote in a recent note. Azek, whose top holder is PE firm Ares Management, is also more highly leveraged than Trex, he said.
“I think they view them as a competitor, but not a true threat for the foreseeable future,” Maroccia said in an interview, referring to Trex’s perception of Azek.
While Maroccia has a buy rating, the majority of analysts tracked by Bloomberg rate Trex at hold, including Ng at Jefferies. For him, the company’s valuation is a roadblock from turning more bullish. Trex warrants a bigger multiple, but it trades at “too large a premium” to its repair and remodel peers, Ng said in a recent note.
Other investors hold a downright bearish wager on Trex’s long-term outlook. In April, famed “Big Short” investor Steve Eisman said in a CNBC interview that he was short the decking materials manufacturer. Short interest has come down from a peak at the end of April but now sits around 15% of float, according to data compiled by financial analytics firm S3 Partners.
Trex is in the midst of a $200 million capital expenditure program that is set to increase capacity by about 70%. The ramp up of additional lines to the Nevada facility will be completed by the end of the second quarter, management said in May. Meanwhile, the construction of a building for the Virginia facility is on schedule.
Trex is moving full speed ahead, but the potential impact of a resurgence in Covid-19 remains a question mark, as cases in some states continue to climb.
Berenberg’s Maroccia said a second wave of coronavirus could pull forward demand for Trex’s products, with homeowners throwing in the towel on travel. However, Ng at Jefferies said it could hurt Trex alongside the broader market, even though the company’s business has shown it’s more resilient.
“We’re not going to try to convince you that they’re recession-proof or second wave-proof,” Ng said.
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