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1 Reason to Think Trex's Surge Is for Real

By Howard Smith - May 14, 2021 at 8:15AM

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The decking company's revenue was boosted by the pandemic-driven home upgrade trend, but it will be a more recent trend pushing sales higher from here.

Many companies benefited from the stay-at-home restrictions that were implemented during the COVID-19 pandemic. With people spending so much more of their time at home, many decided it was time to spruce up their properties, both inside and out. Sales at Home Depot (HD 1.35%) grew 20% in 2020, and Target's (TGT 1.70%) comparable sales growth nearly matched that rate at 19.3%.

So it was no surprise when outdoor decking manufacturer Trex (TREX 3.15%) also reported strong 2020 results: Its sales jumped by 18%. That improved business performance helped push Trex's share prices upward by 86% in 2020. And while the rollout of coronavirus vaccinations is already giving many people the ability to get out of the house and safely return to their workplaces and schools, there's one big reason to believe that this surge in Trex's sales is far from over.

overhead view of Trex composite backyard deck

Trex Enhance composite decking. Image source: Trex.

Trex is a growing business

Trex's sales have been rising for several years, and the market has taken notice. Its composite decking products are an attractive, low-maintenance alternative to wood, and a growing number of consumers have decided it is worth paying more up front for their benefits. Trex's revenue has almost doubled in the last five years, and its stock price has grown considerably faster. 

TREX Chart

TREX data by YCharts

Much of the stock's rise came in 2020. That was partially due to the sales driven by the previously mentioned home improvement trends, but also because of a new growth catalyst that partly explains why sales growth accelerated in the first quarter of 2021. 

There's a lumber shortage out there

Trex just reported its first-quarter 2021 results, and sales grew 23% over the prior-year period. Management also forecast that second-quarter sales would rise by 36% year over year. The company said it is ahead of schedule on its capacity expansion efforts, and that it intends to raise its product prices, effective in August. But there was one other item that should provide a lasting benefit for the company. 

Trex President and CEO Bryan Fairbanks said in a statement that growth in the first quarter was partly due to "accelerated market share gains from wood." That makes sense considering that lumber prices have soared more than 350% over the past year. 

one year chart showing rising lumber price per 1,000 board feet

Lumber price per 1,000 board feet. Image source: Trading Economics.

As the price of any commodity increases, the use of alternatives typically grows. Sometimes there are no feasible substitutes, but that's not the case when it comes to outdoor decking material. In fact, the one disadvantage that Trex used to have was that its products were relatively high-priced compared to wood. Now that skyrocketing lumber costs have taken away wood's price advantage, the composite decking maker is well-positioned for another growth spurt. 

Timing is everything

The timing is great for the company, too. Trex expects to have its new state-of-the-art manufacturing facility in Virginia operating this month, 30 days ahead of schedule. That plant will increase the company's production capacity by 70% over 2019 levels. 

During the first-quarter investor conference call, CEO Fairbanks said, "Our analysis indicates that a 1 percentage point market share gain from wood translates to over $50 million of annual sales." Net sales for 2020 were $881 million. 

Lumber prices will likely head back down at some point. Whether they'll drop to their pre-pandemic levels is anyone's guess. But if a product is superior, customers who have made the switch will likely remain fans and provide word-of-mouth advertising. With Trex's additional production capacity coming online, the company is set to be able to continue to grow and gain market share. While the business will be cyclical, linked to the state of the housing industry, there's currently no end in sight for this surge in Trex's sales.

Howard Smith owns shares of Home Depot. The Motley Fool owns shares of and recommends Home Depot and Trex. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Trex Company, Inc. Stock Quote
Trex Company, Inc.
TREX
$58.98 (3.15%) $1.80
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$314.89 (1.35%) $4.20
Target Corporation Stock Quote
Target Corporation
TGT
$172.48 (1.70%) $2.88

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