Trex Shares Surge as Q2 Earnings Rise on Pent-up Demand

Shares of Trex Co. Inc. (TREX) surged 15% after the company reported second-quarter 2014 earnings of 46 cents on Aug 4, which marked a year-over-year increase of 21% and outpaced the Zacks Consensus Estimate of 44 cents. The improvement was led by pent-up demand and market share gains. Furthermore, several distributors reported record sales of Trex’s products reflecting its expanded distribution footprint and dealer conversions. Moreover, the company has started realizing the benefits of three cost reduction initiatives that it has been implementing this year.

Second-quarter 2014 results reflected a $9.1 million increase in income taxes due to resumption of the normal tax rate after exit from the tax valuation allowance at 2013-end. The increase in taxes had an impact of 27 cents on the quarter’s earnings. In the year-ago quarter, Trex recognized a $1.7 million adjustment to the mold class action provision. Before giving effect to this adjustment, 2013 earnings stood at 43 cents per share.

Operational Update

Total revenue increased 23% year over year to $121 million, missing the Zacks Consensus Estimate of $123 million as well as management’s guidance of $125 million.

Cost of sales increased 24% year over year to $76 million. Gross profit increased 22% to $45 million. Gross margin contracted 40 basis points (bps) to 37.1%.

Selling, general and administrative expenses decreased 13% to $20.3 million. Operating income in the reported quarter increased 82% to $24.7 million from $13.5 million in the year-ago quarter. Operating margin expanded 660 bps to 20.3% in the quarter.

Financial Update

Trex ended the first quarter with cash and cash equivalents of $5.5 million, up from $3.8 million as of Dec 31, 2013. Cash flow from operations was $11.4 million in the first half of fiscal 2014 versus $23 million in the prior-year comparable period.

On May 7, 2014, Trex executed a two-for-one stock split of its common stock. The stock split was in the form of a stock dividend distributed to shareholders of record.

In the reported quarter, Trex completed the $50 million share repurchase program announced in the first quarter of 2014. The company repurchased 1,657,919 shares of its common stock at an average cost of $30.16 per share. Since the third quarter of 2013, in which the initial buyback program was implemented, Trex has repurchased a total of $75 million worth of its outstanding common stock.

Guidance

Backed by strong sales activity in the quarter, for the third quarter of 2014, Trex expects sales of around $92 million, which marks an increase of 27% from the third quarter of 2013.

Our Take

Trex’s cost reduction initiatives are focused on reducing costs and will be accretive to earnings going forward. Earlier this year, Trex marked its foray into a new industry that leverages two of its core strengths: recycling and extrusion. Trex is now manufacturing and selling polyethylene pellets made from recycled plastic into the plastic bag, film and sheet markets. These pellets are expected to partially displace virgin and off-spec resin, thereby lowering the cost for original equipment manufacturers.

Trex will benefit from the ongoing economic recovery. Additionally, the company’s consistent focus on industry-leading distribution presence, best-in-class product platform, low-cost manufacturing and brand will drive growth.

Moreover, Trex’s strategy of offering a wide range of high-performance decking and railing products has so far been successful. These products offer a higher level of fade, scratch and stain resistance. With the growth of high-performing platforms, Trex will also be able to attract more consumers.

Winchester, VA-based Trex manufactures and distributes wood/plastic composite products and related accessories, primarily for residential and commercial decking as well as railing applications in the United States.

Currently, Trex carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Quanex Building Products Corporation (NX) and PGT, Inc. (PGTI). Both of these stocks carry a Zacks Rank #2 (Buy).

Peer Performance

Among Trex’s peers, Aegion Corporation (AEGN) reported adjusted earnings from continuing operations of 34 cents per share, flat year-over-year and at the lower end of management’s guidance range of 34 and 36 cents. The results missed the Zacks Consensus Estimate by a penny.