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Why Trex Stock Rose 26% Last Month

By Jeremy Bowman – Updated Jun 5, 2020 at 9:55AM

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Shares of the premium decking maker gained after a solid first-quarter earnings report.

What happened

Shares of Trex (TREX 0.02%), a maker of premium decking and railing products, were moving higher last month as the company delivered a solid first-quarter earnings report, and benefited from strong sales in the home improvement sector.

According to data from S&P Global Market Intelligence, the stock finished the month up 26%. As you can see from the chart below, the stock gained consistently through May as the earnings report kicked off a rally.

^SPX Chart

^SPX data by YCharts.

So what

Shares of Trex jumped 10% on May 5 after it posted better-than-expected results in the first quarter as revenue rose 12% to $200.4 million, beating estimates at $197.8 million. Management noted robust demand for its residential decking and railing products during the quarter, and profitability ramped up as it lapped new product start-up costs from a year ago. 

A front deck with patio furniture

Image source: Trex.

Gross margin in the quarter increased 620 basis points to 44.8%, while EBITDA margin rose 570 basis points to 29.4%. Earnings per share increased 35% to $0.73, ahead of expectations at $0.61.  

Later in the month, the stock continued to rise as more data confirmed that the home improvement sector remained solid through the pandemic. The Census Bureau reported that retail sales in home improvement were essentially flat in April from the year prior, a positive sign since they plunged in almost every other segment, and Home Depot and Lowe's followed that with strong comparable-store sales in their earnings reports.

Now what

Looking ahead to the second quarter, management's guidance was cautious, calling for $180 million to $190 million in revenue, down 10% from a year ago. The company said sales and production volumes were in line with expectations in April but slowed in May since it's experiencing lower demand from construction projects deemed nonessential and retail partners that are closed. 

A premium seller of cyclical products like decking wouldn't ordinarily be set for growth in a recession, but this is a unique circumstance. Americans are spending more time at home than normal and have limited options for spending money. It's unclear if that pattern will continue, but so far the home improvement sector looks like a winner.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot and Trex. The Motley Fool recommends Lowe's and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Trex Company, Inc. Stock Quote
Trex Company, Inc.
TREX
$45.42 (0.02%) $0.01
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$270.94 (0.67%) $1.80
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$188.13 (0.01%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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