Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is Trex Going to Disappoint Again?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Trex  (NYSE: TREX  )  stunned investors on Aug. 6, when Q2 earnings came in well below expectations. Management blamed the poor quarter's results on weather, due to heavy rains in the spring and early summer on the east coast. Things only got worse from there, with the company revising projections for the second half of the year down. Needless to say, many investors were left wondering where all the "rained out" business from the second quarter went. 

With third quarter earnings set to be delivered on Oct. 25, this question is still unanswered. Let's dig in. 

Management done good
Since taking over in 2008, the current management team, led by CEO Ron Kaplan, has turned Trex around. While the company has yet to match the $365 million in sales it reached in 2007, the more fundamentally important aspects of the business -- profitability, innovative product design, and efficient manufacturing -- have been turned around. 

In 2007, Trex carried over $130 million in debt and over $80 million in inventory, which  --along with high manufacturing overhead -- led to negative cash flow of $25 million, despite $15.7 million in net income.  The weight of all that debt and inventory was drowning the company. Over the five years since, Kaplan and his team have done wonders, whether the measure is product quality, manufacturing efficiency, or capital management:

TREX Net Income TTM Chart

TREX Net Income TTM data by YCharts

The table above shows how much more quickly Trex can turn materials into products, and products into money (Cash Conversion Cycle,) cutting the time from more than 100 days in 2008, to just over 50 days now. This has directly affected both Free Cash Flow and Net Income. However, the lack of revenue growth has stalled the momentum, and is troubling for investors in a rebounding housing market. Here's how a few peers have fared since the beginning of 2009:

TREX Revenue TTM Chart

TREX Revenue TTM data by YCharts

As you can see, despite management's solid job in making Trex profitable and efficient, it hasn't done a good job of attracting more customers, even as it has expanded and enhanced (link opens PDF; refer to page 10-22 for product details) its product line. When the much larger Home Depot  (NYSE: HD  ) and Lowe's  (NYSE: LOW  ) are growing faster, there's reason for concern, especially when specialty retailer Lumber Liquidators  (NYSE: LL  ) has nearly doubled its sales in the same time frame. 

It's not that you're selling; It's what you're selling
The best answer may be an analysis of what's happening with home sales. It has been widely speculated that a large percentage of the residential real estate recovery over the past couple of years has been largely driven by investors. And while investors will spend money on properties, the investments fall into the "must have" category first. The result is that discount flooring a la Lumber Liquidators and the various items inside the big-box stores gets priority over a high-end composite deck. Kaplan, from the Q2 earnings call (slightly paraphrased for brevity):

"I don't want to blame everything on the weather ... The recovery in repair and remodeling is just not as aggressive as the resurgence in new construction. We think it will follow, but it's a little bit of a slow rate of increase. We are managing our balance sheet carefully ... We certainly haven't lost any market position; our market position is strong and getting stronger. We've added 230 stores in the big box category that we didn't have last year ... It gets lumpy from quarter to quarter, but on the whole, we are confident in the future."

So homebuilders aren't using Trex, and while Lumber Liquidators is going gangbusters with people remodeling or updating, and even Home Depot and Lowe's are growing sales as the market rebounds, those expensive, composite wood decks just aren't getting built. 

Patience and trust: has Kaplan earned it?
I think for now, the answer is, "yes." This is the team that turned the company around, and so far, this is really the first time they've had to backtrack on the results. While there's a chance the numbers could be better than the "flat to low single-digit" growth we've been told to expect, it's probably best to keep expectations muted for now, and hold onto your shares. This is, after all, still a very well-run company. But if we keep getting more of the same zero-growth in the quarters to come, then it's probably time to move on.

If you're looking for somewhere to invest your money today, Lumber Liquidators is profitable, well-run, and it's actually growing. It's better to buy the great company that we know is growing than buy the one you hope will grow. Face it: Hope is not a very Foolish investing strategy. 


For a much more Foolish investing strategy....
Every good investor wants to build that perfect portfolio that they can set and forget forever. Fortunately, it's easier than anyone ever knew. We've uncovered the pillars of such a portfolio today and we're willing to share The Motley Fool's 3 Stocks to Own Forever. Simply stated, we think they're the best stocks for true long-term investors to know about, and you can uncover them for free today, instantly; just click here now.

Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 25, 2013, at 12:35 PM, rsassygal wrote:

    Well considering the stock is up over 20% today after announcing third quarter results that is a resounding NO!

  • Report this Comment On October 25, 2013, at 9:09 PM, TMFVelvetHammer wrote:


    I'm quite pleased with the projections for the next year. I think growth is going to be really strong moving forward.

    Fool on!

    Jason Hall

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2676145, ~/Articles/ArticleHandler.aspx, 9/24/2016 10:21:43 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:00 PM
HD $127.79 Down -0.96 -0.75%
Home Depot CAPS Rating: ****
LL $17.97 Down -0.26 -1.43%
Lumber Liquidators CAPS Rating: ***
LOW $72.35 Up +0.27 +0.37%
Lowe's CAPS Rating: ****
TREX $58.55 Down -0.01 -0.02%
Trex CAPS Rating: *****