Always watch the competition. Investors looking at amazing growth rates and hefty margins might assume they'll go on forever, but competitors are always angling for a piece of the action.
So in the spirit of competition, this article will focus on a fast grower with an early lead on its competitors. There is just such a company in Trex (NYSE: TWP), a Motley Fool Stock Advisor pick that has risen 67% since Tom Gardner singled it out in November 2003.
Trex sells special composite materials used to build outdoor decks. These boards don't rot or crack and need almost no yearly maintenance.
Trex has had much success with its products, seeing sales growth of 56% in the most recent quarter. With a history of double-digit growth rates and net profit margins over 10%, Trex should obviously keep an eye on the competition.
The first and main competitor Trex has been battling is treated pine. Chemically treated pine is used to build 85% or so of decks and is considerably cheaper than Trex brand. Trex has been winning market share for quite a while, though, by emphasizing the benefits of composites over treated pine.
The next threat to Trex has been growing in recent years: competing composite manufacturers. There are plenty of smaller companies and a few significant competitors such as Louisiana-Pacific (NYSE: LPX) and AERT (Nasdaq: AERTA). Trex is estimated at having 40%-45% of the wholesale composite market (on a $ sales basis), and while competitors have momentum, Trex is more interested in gaining converts from the wood decking ranks than battling imitators for composite market share.
To keep the lead, Trex must continue increasing its distribution channels. The company and its competitors are currently expanding their network of wholesalers and independent retailers to include the home improvement giants we all know and love. Lowe's (NYSE: LOW) has signed an exclusive deal with AERT, while Home Depot (NYSE: HD) lets customers order Trex and several other brands.
But distribution matters only if customers keep buying. Some newer competitors have already seen red. Just ask Kadant (NYSE: KAI), who recently put their composite decking division up for sale because of excessive warranty claims -- not to mention losses.
Hopefully for Trex, more companies will hang up their gloves after realizing the difficulty of the composite decking industry. In the meantime, however, investors in Trex should keep glancing back at the competitors and keep the wood-to-composite conversion movement in their peripheral vision.
Fool contributor Matt Thurmond decided not to take the plunge in Trex last November, much to his later dismay. He owns no other stocks mentioned in this article.
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