What happened
Trex (TREX -1.08%) reported year-end earnings after markets closed on the last day of February, so it was March by the time investors weighed in on the results. Shares of the composite decking company fell sharply in the early days of the month and failed to recover, finishing off 28.9% for the month, according to data provided by S&P Global Market Intelligence.
So what
There was nothing wrong with Trex's quarter. The company actually beat expectations both in terms of earnings per share and revenue. But the results did little to get investors excited about what is to come. Trex in recent years has benefited from a number of strong tailwinds, including a robust housing market and a pandemic-induced frenzy to remodel and upgrade existing houses. With interest rates potentially on the rise, which historically has eaten into housing, and companies plotting a post-pandemic return to the office, it appears those tailwinds could be fading.
Image source: Trex.
In the days that followed earnings a number of analysts lowered their price targets on the stock, and late in the month Trex was downgraded to underperform at Exane BNP Paribas.
Trex didn't do itself any favors by taking a goodwill impairment charge of $54 million related to its commercial products business. Commercial accounts for just 5% of revenue and tends to be lower-margin, but investors had hoped it would offer the business some diversification away from residential construction and remodeling. It's possible the commercial weakness was due to the pandemic, which has drawn business away from commercial establishments, and will end up being temporary, but for now at least the evidence suggests Trex might have more difficulty than some bulls had hoped in building that business.
Now what
The March slide continued an already established pattern for Trex, which is now down nearly 50% year to date. It's hard to say for sure what will happen in the quarters to come, but for long-term focused investors there is a lot to like about Trex at these levels.
The company has established itself as the dominant name in composite decking, a low-maintenance and green alternative to real wood. But Trex for all of its growth is still just a company with $1.2 billion in sales selling into an $8 billion U.S. decking and railing market, with opportunities to expand both internationally and by building out adjacent products like cladding, patio furniture, and outdoor kitchens.
Trex over the past few years has invested more than $200 million to boost capacity. At this moment, it is questionable whether it will need all that added capacity as soon as it hoped.
