Please ensure Javascript is enabled for purposes of website accessibility

1 Wall Street Pro Warms Up to Trex Stock

By Rick Munarriz – Jun 1, 2017 at 2:14PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Seaport Global upgrades shares of the top dog in premium weather-resistant alternative decking. It's a valuation call.

The popularity of Trex (TREX 1.76%) products keeps growing, but with the shares now trading well below their February peak, there's an analyst viewing the investment as a buying opportunity. Matt McCall at Seaport Global upgraded Trex stock on Thursday, boosting his rating from neutral to buy.

McCall feels that Trex's technology-driven cost advantages will deliver accelerating growth. He also sees double-digit volume growth as a result of recent and expected investments. He feels that Trex's status as the top established brand in weather-resistant alternative decking makes it worthy of a brand-name valuation premium. McCall is slapping a $74 price target on the shares, suggesting 15% of upside off of Wednesday's market close. 

A patio made of Trex decking and railing materials.

Image source: Trex.

Planks a lot

Trex stock soared 69% last year, but the shares have been in a lull this year. The stock was trading practically unchanged year to date -- going from $64.40 to $64.27 -- before Thursday morning's upgrade-fueled pop.

The flooring specialist has been doing just fine, fundamentally speaking. It's been growing sales at a steady clip in the high single- and low double-digits. It has consistently landed ahead of Wall Street's profit targets over the past year. Undertaking home improvement projects is a cyclical endeavor, but Trex is posting smooth growth through the sometimes choppy waters. 

Trex's latest quarter was another beat on both ends of the income statement. Revenue rose 10% to $144.8 million in last month's first-quarter report. Earnings grew even faster, climbing from $0.80 a share a year earlier to $0.95 a share this time around. Analysts were only holding out for a profit of $0.95 a share on $144.3 million in revenue. 

McCall at Seaport Global initiated coverage on Trex in mid-November with the neutral rating that stuck until Thursday morning. He was concerned about the stock's valuation after its heady run through 2016. Staying on the sidelines proved to be the right call. The stock has gone nowhere -- slightly lower, actually -- in the seven months since he made the call despite the general market being on a roll. 

We've now seen Trex pad its trailing sales and earnings through the two subsequent quarters, and with the stock trading just below his initial call, it does make it that much more compelling on a valuation basis. Trex has also been a voracious eater of its own stock, and those share buybacks naturally prop up profitability on a per-share basis. Trex itself may be vulnerable if the economy or housing market take a hit, but a stock that's marching in place as its fundamentals improve is more often than not a dinner bell for opportunistic investors. 

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Trex. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.