Impressive earnings trend, strong residential business along with manufacturing cost saving initiatives bode well for Trex Company, Inc. (TREX - Free Report) . Consequently, shares of the company have gained 16.8% so far this year against its industry’s decline of 20.7%. However, rising freight and material costs, along with product innovation expenses pose concerns.
Catalysts Driving Growth
Strong Residential Business: The company’s Residential business, accounting for 88.4% of its total revenues, has been performing well of late. The segment has been experiencing strong demand, reflecting a favorable macro-economic environment and brand leadership. During the first nine months of 2018, sales in the said segment grew 13.3% year over year, backed by volume growth in Trex branded decking and railing products. Also, the business has been experiencing high consumer confidence levels, along with increasing repair and remodeling spend.
Trex Residential Products is capturing an increasing share of the wood market, aided by continued investments in product development activities, branding and marketing programs.
Manufacturing Cost Saving Initiatives: In the third quarter of 2018, Trex Company’s cost of sales, as a percentage of total revenues, declined 100 basis points (bps) due to successful implementation of manufacturing cost saving programs, lower recycled polyethylene input costs and higher capacity utilization. As a result, its gross margin surged 100 bps during the quarter.
With operating leverage being key part of its business model, the company intends to invest in strong manufacturing cost saving projects. In fact, its first phase of production line improvement project is likely to increase throughput in the Winchester facility by more than 20% in 2019.
Upbeat Commercial Products Segment: On Jul 31, 2017, the company acquired certain assets and assumed liabilities of SC Company, and formed its new business segment, namely Trex Commercial Products. The segment designs, engineers and markets modular architectural railing, staging, acoustical and seating systems for the commercial and multi-family market. Notably, in the first nine months of 2018, the segment generated $52.9 million of net sales, up 244.9% year over year. Also, the segment earned $2.0 million of net income (which includes amortization expenses of $2.9 million).
Causes of Concern
Rising Raw Material & Freight Costs: Trex Company has been experiencing higher raw material and freight costs over the past few quarters. Although the company is implementing various cost-saving initiatives, non-recycled polyethylene material costs are dampening overall performance.
Product Innovation Costs: As part of ongoing product development investments, the company keeps on introducing new products in a bid to expand its market reach. However, owing to regular product innovation, the company is experiencing higher product innovation costs.
Zacks Rank & Key Picks
Currently, Trex Company carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Zacks Construction sector include Great Lakes Dredge & Dock Corporation (GLDD - Free Report) , Comfort Systems USA, Inc. (FIX - Free Report) and EMCOR Group, Inc. (EME - Free Report) . While Great Lakes Dredge & Dock and Comfort Systems sport a Zacks Rank #1 (Strong Buy), EMCOR carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Great Lakes Dredge & Dock’s earnings for 2018 are expected to increase 111.1%.
Comfort Systems surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with the average being 16.5%.
EMCOR’s 2018 earnings are expected to grow 20%.
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