Trex: An Old Opportunity With New Products

I final coated Trex (NYSE:TREX) again in March the place I highlighted some key takeaways from the corporate’s 2022 annual outcomes. I maintained a earlier BUY ranking, however will downgrade now to HOLD as shares seem totally priced at present ranges.

This is not a sign I imagine Trex is poised for suboptimal efficiency. I am really fairly bullish on Trex headed into 2024, and imagine the corporate is in a much better place than final yr at the moment.

However with a share worth north of $60, coupled with Trex’s income development goal of 12% by means of 2028, I can not make a case for shares to compound +5% above the S&P 500 over the identical time interval. And if you cannot beat the market, it’s possible you’ll as properly take part.

Nonetheless, I’m enthusiastic about a number of the new and present alternatives Trex is leaning into for 2024. I am going to spotlight a number of right here, and will probably be poised to take up a place if the market decides to re-rate Trex shares within the close to future

Leaning Into The Railing Enterprise

Admittedly, previous to listening to Trex’s Q3 2023 earnings name this week, I hadn’t listened to at least one since This fall 2022. Evidently, so much has occurred at Trex over the previous few months as a result of I went from listening to subsequent to nothing about railing to listening to so much about railing.

Certainly, after Trex offered its business merchandise line in late 2022, which principally put in rod-rail techniques, I assumed the corporate wished out of the railing enterprise. Or that there merely wasn’t sufficient meat on the bone to warrant persevering with operations.

However that appears to have shifted, particularly within the residential house. I am guessing that by means of its market analysis, administration recognized a significant alternative in railing, and delved into product innovation to see if it might compete with vinyl. Trex was profitable, and rolled out its Choose T-Rail product in Q2 2023 which is seeing early success.

Listed below are a number of excerpts from Trex CEO Bryan Fairbanks throughout the Q3 2023 earnings name:

We additionally see vital development potential in our broader Residential section, pushed by railing, fasteners, cladding and fencing, which along with decking brings our total addressable market alternative to roughly $14 billion. We imagine in alternatives in railing alone provide substantial development potential. The expansion will probably be pushed by expanded attachment charges coupled with enticing options to match shopper preferences at every worth level whereas nonetheless delivering on Trex high quality.

And:

Whereas we’ve manufactured and offered Trex railing merchandise since our early years, we just lately accelerated our efforts to additional penetrate the market. Notably, we launched our Trex Choose T-Rail system within the second quarter. This composite rail system is priced competitively in opposition to low-cost vinyl railing but outperforms vinyl each by way of aesthetics and efficiency. T-Rail is off to an incredible begin, increasing our share in railing and constructing larger consciousness of the Trex model on this necessary class. The T-Rail launch continues our technique of offering railing product at each worth level as we’ve efficiently completed in decking.

Trex continues to be primarily a decking firm, nevertheless it has aspirations to extend attachment charges for railing, which presently ranges wildly by area from 15% to 50%. Attachment charges refers back to the share of Trex decking prospects who additionally buy railing. CEO Bryan Fairbanks had this to say throughout the Q3 2023 name:

However what we do see is the place we’ve these decrease attachment charges, that implies that there are areas of {the marketplace} that we’re not hitting the candy spot for what they’re on the lookout for they usually’re all alternative for us to have the ability to develop that attachment charge to get it as much as 50% to 60% throughout the board.

New Product Improvements

On November 9, Trex introduced a complete slew of latest product improvements. Administration hinted round these throughout the Q3 2023 earnings name, however wouldn’t give particulars. These particulars are actually here. A couple of of the highlights embody:

• {Hardware} together with fasteners, patented drill bits, depth setters, and plugs
• Trex Signature sequence to compete on the high-end of the market
• New heat-mitigating know-how with the Trex Transcend Lineage line
• Cable and glass railing techniques
• Lighted, solar-powered put up caps
• And naturally, the Trex Choose T-Rail system talked about beforehand

I imagine these new merchandise and improvements have the potential to drive vital development for Trex over the long run. For probably the most half, Trex is an organization that sells $1 billion in composite decking. However with these new improvements, the corporate can seize larger share of pockets.

Usually, should you’re putting in a deck, you are going to want fasteners, railing, and lighting. Trex is now giving prospects the chance to one-stop-shop. This may solely be a optimistic.

When Am I A Purchaser?

For me to take up a place, I must see shares beneath $50. Trex shares are at $61.10 as of this writing. Which means I am on the lookout for an 18% drop from right here.

I doubt the market cooperates with me on this goal. Seeing how the inventory is up 12% since asserting earnings on October 30. And administration was extra optimistic than pessimistic going into 2024, with out disclosing an excessive amount of element.

However as an investor, you have to follow your individual convictions. Even when it means you “miss” a chance. Relaxation assured, “lacking” alternatives will probably prevent greater than it helps you in the long term.

Conclusion

I am an enormous fan of Trex. It is an incredible firm providing an incredible product, and is poised to select up larger share of pockets from its prospects. It is extremely worthwhile, and has generated good returns for shareholders, rising 6x over the previous 10 years.

Nonetheless, with shares north of $60, the inventory is simply too costly. And I’ve a tough time making a case for it to handily beat the S&P 500 over the following 5+ years.

If you happen to’re an present shareholder, I say HOLD; you personal a stable firm. However I would not advocate taking over a brand new place until Trex drops beneath $50.