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Lumber Costs Have Soared and This Stock Could Be a Big Winner

By Matthew Frankel, CFP® and Jason Hall - Jun 23, 2021 at 7:17AM

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This company could actually benefit from higher wood prices.

Even after a recent pullback, lumber prices are dramatically higher than they were a year ago. In this Fool Live clip, recorded on June 11, contributors Jason Hall and Matt Frankel, CFP, discuss why Trex (TREX -14.96%) could be a big winner. 

Jason Hall: David Gardner and I interviewed their current CEO right here on Fool live, I don't know, maybe earlier this year. Trex is a really interesting company. This is a manufacturer that makes decking. It seems like, well, that sounds like the most boring business you guys have talked about. But what's really interesting about Trex is the decking that they manufacture is 95% from waste material that would otherwise end up in landfills. Scrap wood from lumber manufacturers, from other paper companies, and also polyethylene film for the most part. A lot of times we think about it being plastic bags, like grocery bags, that kind of stuff, that's part of their stream. But the vast majority of it is things like pallet wrap. Industrial use, logistics used plastics, which are growing in demand. The company uses those two materials, has a proprietary extrusion technology that uses to manufacturer some of the best, most attractive, highest rated decking that you can find. The company has enormous distribution. By far, it has a distribution lead over any of its competitors, has about 50%. That's more than 50% of the market share in this wood alternative decking product. You can find it in Lowe's (LOW -3.29%). You can find it in Home Depot (HD -2.17%). But I think probably their biggest advantage is that they're also in a lot of regional distributors that supply a lot of contractors, the build decking. What Trex has set itself aside is, has programs for them, brings them to their locations for training programs. Does all of these things to really cement its relationships with the people that are buying the most of the stacking that will come back and continue buying it. Because it's predictability of the product, reliability, happy customers. Then as an owner, why would you want to own it? You don't have to treat it. You don't have to stain it. You don't have to replace splintered boards. It's 25-year warranty on these products. They hold up very, very well, quality of life. By the way, the big trends we're talking about with housing, housing costs, people moving into houses. What do people do when they buy a house? They spend money inside, and then they come around, they spend money outside. What do they do when the house is too expensive? The markets move and they can't buy a new house, a bigger house, they spend money on the house that they have. All of these trends are really, really good for Trex in terms of its ability to continue to win this market. Just again to stress, this is a manufacturer here. If you look, I'm going to pull the earnings-per-share, but if you go back over the past five or six years and again 2020, everything that happened with the pandemic. This manufacturer that is able to consistently have gross margins in the high 30% range and operating margins above 25%. You guys, that is incredible. It's absolutely credible.

Matt Frankel: That was before lumber prices tripled and made Trex more attractive.

Hall: I'm so glad you said that, because that's a huge advantage. Here's the thing, we talked about this, lumber prices were up. They weren't as ridiculously up as they are now, but they were up when we talked to their CEO about it and asked him, "Do you intend to raise prices?" He says, "We have a cadence of price raises that we do on a yearly basis. We're not going to just arbitrarily raise prices now just because we can. That's not the kind of business that we are." That really, really impressed me. But I want to show this here too. This is a company that all those economic factors that operating leverage has increased earnings per share almost 3,400% over the past decade. The stock price has gone up over 3,000% along the way. That's it.

Jason Hall owns shares of Trex. Matthew Frankel, CFP 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 Lowes. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Trex Company, Inc. Stock Quote
Trex Company, Inc.
$54.28 (-14.96%) $-9.55
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$305.21 (-2.17%) $-6.76
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$195.20 (-3.29%) $-6.64

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