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Trex Company Inc Stock Is Up 12% After Earnings: Here's Why

By Jason Hall - May 8, 2018 at 1:16PM

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Another quarter of double-digit sales and profit growth -- plus guidance for more of the same -- has the market excited.

What happened

Shares of decking and railing manufacturer Trex Company Inc (TREX -1.21%) are up 12% at 11:56 a.m. EDT on May 8, following the after-market-close release of the company's first-quarter earnings results on May 7. The leading wood-alternative decking maker reported sales increased 18%, while earnings were up 32% to $1.25 per share, the best-ever for the company in the first quarter.

So what

Trex, which now operates two separate segments -- commercial products and residential products -- reported sales were up 7% in its residential products segment, while the commercial product segment, which was created from last summer's acquisition of commercial and industrial railing maker SC Products, contributed $16 million in incremental revenue in the quarter.

A home with a multi-level Trex deck.

Image source: Trex Company Inc.

Gross margin was 44.8%, down slightly from last year's first quarter. However, this was due to the additional sales from the commercial products segment that didn't exist one year ago, which is a lower-margin business than the residential decking and railing business. While consolidated gross margin percent declined, the residential products segment generated gross margin of 47.6%, a substantial increase from 45% in last year's first quarter.

Earnings were also positively affected by a better-than-expected tax rate, which came in at 22%, below the 25% full-year target.

Now what

In addition to another quarter of strong sales growth, margin expansion, and earnings growth, Trex management has a positive outlook. "Excellent brand positioning in a growing category and strong early season demand underpin our confidence heading into 2018," said CEO Jim Cline in the earnings release. "In addition to our proven ability to gain share from the large wood market and the composite sector, we are pleased with the cross-product development and cross-selling opportunities that are emerging between our Residential and Commercial operations." 

The company announced guidance for $191 million in total sales for the second quarter, comprised of $174 million in residential products, and $17 million in commercial products. This would be a 21% increase from last year's second quarter, with residential products sales expected to increase 10% year over year. The company didn't announce guidance for profits in Q2, but based on its recent execution on turning sales growth into even higher incremental profits, it looks like investors are counting on earnings growing even faster than the 21% sales growth.

With a healthy economy and strong housing demand, Trex continues to deliver. If that remains the case, Trex's prospects for continued growth look very good. 

Jason Hall owns shares of Trex. The Motley Fool owns shares of and recommends Trex. The Motley Fool has a disclosure policy.

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