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Why Shares of Trex Are Falling Today

By Lou Whiteman - Oct 29, 2019 at 3:28PM

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Earnings were solid, but apparently not strong enough.

What happened

Shares of Trex Co. (TREX -5.75%) were trading down 6% on Tuesday afternoon, and were initially down by more than 10%, after the composite-wood manufacturer reported third-quarter results. The company generated earnings that came in ahead of consensus, but revenue was a little light, and Trex signaled a seasonal slowdown heading into the fourth quarter.

So what

After markets closed Monday, Trex reported third-quarter earnings of $0.72 per share, ahead of the $0.68 consensus, despite revenue that at $195 million was nearly $15 million shy of expectations.

A Trex composite deck on a waterfront property

Image source: Trex.

The company is clearly in growth mode. Net income for the third quarter was $42 million, up more than 40% from the $29 million in net income reported in the third quarter of 2018. Revenue was up 17% over the comparable period in 2018, led by a 24% increase in residential product sales.

"We continued to experience robust demand for our residential decking products in the third quarter," CEO James E. Cline said in a statement. "Growth was led by the appeal of the Trex brand and the value proposition our products represent, strong demand for the new Enhance product line and positive market conditions."

Cline said he expects net sales to fall to about $160 million in the fourth quarter, which would still represent 14% growth compared to the same three months of 2018, and "modest" sequential gross-margin expansion. Trex also cut full-year capital spending guidance by $10 million, to between $65 million and $70 million, due to timing of actual cash payments related to the company's $200 million capacity expansion project.

Now what

The earnings seemed solid, so why are shares of Trex down on Tuesday? Trex has been an outperformer in recent months, up 44% year to date even with Tuesday's slide, and the company came into earnings season priced for perfection.

Trex is vulnerable to a downturn in new construction or renovation spending. And as noted, it's expanding capacity late in the economic cycle, and at a time when competitors are launching their own composite-wood products. Given the current economic conditions, the stock's healthy recent run, and the less-than-expected revenue growth, some investors might have seen it as a good time to take some profits.

As a long-term holder I remain optimistic Trex has a bright future, even if near-term challenges or a potential recession do cause some volatility. These latest quarterly results do nothing to change my outlook.

Lou Whiteman owns shares of Trex. The Motley Fool owns shares of and recommends Trex. The Motley Fool has a disclosure policy.

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