It's been a rough week for Trex (TREX 2.19%) investors. Shares of the leader in composite decking materials plummeted 31% on Wednesday, following a poorly received financial report.
It didn't seem to matter that Trex -- straddling the realms of housing stocks and construction stocks -- posted better than 20% growth on both ends of the income statement. Trex stock hit a five-year low during Wednesday's sell-off. The stock has now shed more than half of its value in 2025, but this feels like a golden opportunity to buy into a niche leader at a great price. Like the housing market itself, sometimes it pays to take a chance on a fixer-upper.
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The deck is stacked in its favor
Trex invented composite decking, transforming more than 5 billion pounds of polyethylene film over the years into durable decking products consisting of 95% reclaimed and recycled materials. You don't need to buy into the eco-friendly benefits of Trex to buy into the platform for your next outdoor renovation project. The longevity of the product over a traditional wood deck stands out.
The initial cost of building out a Trex deck will cost quite a bit more than wood. However, when you compare the 25- to 50-year residential warranties of Trex buildouts to the perpetual maintenance, repair, and eventual rebuilds of traditional wood projects, it starts to pay off as the better financial move. Saving money up front on wood can result in paying more than twice as much over 25 years, not to mention the frustration, scheduling, and time squandered on the maintenance itself.
Despite the financial and stress-free benefits of going with Trex, 75% of all deck projects go with wood. Trex dominates the composite market it pioneered with more than 50% of that specialty market, but it still only has a 14% slice of the total U.S. decking and related railing market. This is the bullish thesis that helped Trex rattle off 10 consecutive years of growth of 9% or better through 2021, culminating in a 36% top-line pop in 2021. Unfortunately, these past four years have been challenging. The culprit is easy enough to identify. Mortgage rates have more than doubled since the end of 2021.
NYSE: TREX
Key Data Points
Walking the plank
The surge in rates since the economy started emerging out of the pandemic has hurt Trex in two painful ways. Naturally the rising cost of borrowing makes it harder to finance home renovation bucket list items. The popular art of cash-out refinancing through the 2010s -- where homeowners could replace existing mortgages with lower rates and take out money to use for big-ticket splurges including home improvement projects -- isn't a mainstream option. Most homeowners refinancing today would face higher rates than they are currently paying.
This brings us to the second jab at Trex in the current rate environment. Folks locked into lower rates don't want to put their homes on the market. The resale market has been icy for years. Existing home sales have fallen sharply since late 2021. This matters because no one is as motivated to expand a home's living space into the backyard as a new buyer.
This week's financial update may not seem bad at all, on the surface. Net sales rose 22% in the third quarter. Reported net income climbed 28%, with adjusted earnings moving even higher. It's a back lot facade. Trex suffered a 23% plunge in sales for the same period a year earlier. In other words, Trex net sales are lower in the third quarter than they were two years ago. Analysts were expecting a bigger bounce off last year's depressed showing.
New guidance for the current quarter is disappointing, but a different kind of back lot facade. Trex is now bracing investors for an 11% to 16% top-line decline in the fourth quarter, but that's not necessarily a deal-breaker. This is a seasonal business. Folks tend to take on outdoor decking projects in the first half of the year, as the weather starts to improve to make the most of the expanded living space.
Check yourself before you Trex yourself
This doesn't mean that a Trex sell-off isn't warranted. Trex warned that gross margin should contract by 250 basis points next year, nixing seasonality as a scapegoat. Lower guidance is fueled by concerns that distributors will pare back their inventory of Trex products given the uncertain market recovery. Another thing to worry about is that CEO Bryan Fairbanks mentioned on Tuesday afternoon's earnings call that it was going to have to match an increase in marketing being spent by their competitors to stand out. Competition? Wasn't the long-term bullish thesis here that Trex was the top dog in a niche that was gaining market share at the expense of traditional decking specialists?
Trex investors now have more sheep to count before heading into an uneasy slumber. However, there's also comfort in the markdown. I hate to crash the patio pity party, but Trex is trading for just 16 times depressed forward earnings estimates. It will recover, it just might take a little longer to see mortgage rates tick lower and consumer spending tick higher.
The last time that Trex traded this low was April 2020. Remember that month? That was a pretty gloomy time. More importantly, trailing sales and earnings are roughly 50% higher now than they were at the end of 2019. With Trex shares now cut by more than half in 2025, tax loss harvesting could weigh on the shares in the coming weeks. However, don't be surprised if years -- if not months -- from now, this awful week with an awful report was the ideal buying opportunity for Trex.
