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Trex Gains on Solid Q3 Earnings

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Shares of Trex Co. Inc. (TREX - Free Report) gained 27% since it reported improved third-quarter 2013 earnings on Oct 25. Adjusted earnings per share increased 25% year over year to 45 cents from 36 cents. The results also surpassed the Zacks Consensus Estimate of 34 cents.
During third-quarter 2013, Trex recognized non-operating charges of $22.9 million. In the prior year quarter, Trex incurred charges of $20 million due to an increase in warranty reserve and a $0.5 million related tax charge. Including these charges, the company recorded a loss per share of 91 cents in the reported quarter compared to the loss per share of 86 cents a year ago.

Operational Update

Total revenue improved 5% year over year to an adjusted $74 million, ahead of the Zacks Consensus Estimate of $73 million as well as the management guidance of $72 million. The improvement was driven by a shift in sales mix to high-performance decking and railing products, partly offset by decrease in sales volume and charge related to market share expansion.

Adjusted cost of sales increased 7% year over year to $52 million. Adjusted gross profit declined 0.9% to $21.9 million. Gross margin contracted 100 basis points (bps) to 30%.
Adjusted selling, general and administrative expenses declined 10% to $14.2 million from $15.8 million in the year-ago quarter. Adjusted operating income was $7.7 million in the reported quarter, up 22% from $6.3 million in the year-ago quarter. Operating margin expanded 200 basis points to 10% in the quarter. Including special items (charge to warranty reserve, corporate office sublet charge and a provision for the mold class action) Trex posted an operating loss of $15 million compared with $13.7 million in the year-ago quarter.
Financial Updates

As of Sep 30, 2013, cash and cash equivalents were $19.6 million, a significant improvement from $2.1 million as of Dec 31, 2012. Cash flow from operating activities for the first nine-month period was $56 million, down from $60 million in the comparable period a year ago. The company repurchased 561,255 shares in the reported quarter to close its $25 million share repurchase program. The company again declared a stock repurchase program. As per the program, Trex will buy back shares of up to $30 million over a four-month period.

Trex generated $44 million of free cash flow for the first nine-month period of 2013 compared to $55 million in 2012. The reduction was due to increased capital expenditures and lesser reduction in inventory, partially offset by the favorable timing of accounts receivable collections. The company has no debt on its balance sheet.


For the fourth quarter of 2013, Trex expects sales of $50 million, indicating an increase of 9% from 2012. SG&A spending is expected to lower by around $2 million from the prior-year quarter primarily due to reduced incentive compensation.

Our Take

Trex’s strategy of offering a full line-up of best-in-class, high-performance decking and railing products this year has been effective so far. These products offer a higher level of fade, scratch and stain resistance. Moreover, with growing high-performing platforms, the company will be able to attract more consumers.

Trex is also expanding internationally. The company recently announced the inclusion of Babcock Lumber Company to its distribution network. Not only will Babcock Lumber make Trex’s presence in the Mid-Atlantic region a strong one, it will also help in offering optimum level of service to dealers. The company is likely to gain from its share repurchase program and strong financial condition.
Winchester, Va.-based Trex Company manufactures and distributes wood/plastic composite products and related accessories, primarily for residential and commercial decking and railing applications in the United States.

Trex retains a Zacks Rank #3 (Hold). Masco Corporation (MAS - Free Report) also belongs to the building and construction industry and holds a Zacks Rank #2 (Buy).

Among Trex’s peers, Armstrong World Industries, Inc. (AWI - Free Report) reported third-quarter 2013 adjusted earnings of 87 cents per share, down 11% from 98 cents a share in the year-ago period. The results beat the Zacks Consensus Estimate by a penny. Another competitor, CaesarStone Sdot-Yam Ltd. (CSTE - Free Report) , is yet to announce its third-quarter results.

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