I've looked at Trex (NYSE:TREX) several times as a possible stock for the eco-friendly Prosocial Portfolio I'm managing for Fool.com. However, every single time I consider adding it, I find something in the company's Securities & Exchange Commission filings that sketches me out.
Recently, Trex's quarterly sales increase -- as well as my observation that its PEG ratio is just 0.82, signaling an undervalued stock -- made me revisit the idea once again. Trex shares have performed very well this year, but there's also credence to the idea that housing has only just started to recover.
Like retailers Home Depot (NYSE:HD) and Lowe's (NYSE:LOW), not to mention flooring company Lumber Liquidators (NYSE:LL), Trex could be a major beneficiary as homeowners start sprucing up their homes again in greater numbers. Trex might even have a better advantage over other home-improvement-related companies if green consumption continues to grow, boosting eco-friendly alternatives.
You see, Trex decking and other building materials aren't made of virgin lumber. They are made of a wood/plastic composite that the company claims is far more weather-resistant than traditional deck products. Trex claims its products "will never rot, crack or splinter" and that they "never need painting or staining for protection."
Given the fact that the company transforms millions of pounds of recycled and reclaimed plastic and waste wood into its products every year, it's an environmentally friendly choice, too. If you've ever wondered what happens to those pesky and plentiful plastic grocery bags, Trex recycles more than 1.3 billion of them every year, lessening the bags' negative impact.
The first time I got the impression that the red flag of risk was waving, I noted that Trex has had a tough (and expensive) time dealing with warranty claims. In other words, many Trex customers felt they had received a faulty product, and Trex had its products under warranty for 25 years for residential use and 10 years for commercial use.
Unfortunately, products from Trex's Nevada plant did fail, and since 2007 Trex has been paying out claims related to "surface flaking" to affected customers. That monetary figure has fallen from a whopping $28 million in 2007 to $8 million in 2011. Although the warranty situation is improving from its peak, the company faces ongoing lawsuits alleging defective products and allegations it misrepresented the likelihood of mold growth, for example.
Then I ran across a recent court order filed with the SEC, asking for confidential treatment of a tidbit in Trex's recently filed Form 10-Q. The exhibit in question attaches a retention agreement for executive William Gupp, which includes a restricted stock award and a cash payment of $437,920 once a "strategic legal matter" is resolved. These payments won't kick in before Aug. 15, 2015.
William Gupp is the company's chief administrative officer, general counsel, and secretary. The confidentiality request apparently shields disclosure of the details of this "strategic legal matter," and it's requested to be kept confidential through Nov. 2022 -- an entire decade.
Let's not confuse Gupp's retention agreement with that recently penned for CEO Ronald Kaplan, though. Should he stay on through Aug. 15, 2015, he'll receive a cash payment of nearly $1.1 million and grants for about 37,000 shares of stock. In fact, the 10-Q exhibits attach retention agreements for many members of the top echelon of the company, although Gupp's looks the most interesting given the secrecy clause.
Green is not enough
It's too bad, since I've liked Trex's green tinge. I always love the idea of "repurposing" of plastic; we already have too much of the stuff clogging the planet, and cutting down fresh trees seems wasteful and unsustainable when we're smart and innovative enough to come up with other options.
However, I'd say it's a bad sign when every time you crack open a few SEC filings for a company you run across something that strikes you as unusual, and possibly a little sketchy. Green is not enough; I have long felt similarly about Green Mountain Coffee Roasters (NASDAQ:GMCR), which has lots of socially responsible cred, but has also exhibited a ton of risky red flags, including allegations of accounting irregularities and a poshly paid new CEO.
On the corporate governance level, retention agreements complete with large bonuses don't sit well with me; secretiveness doesn't either. Why are all these members of management being so actively (and financially) courted to stay on for several years? It seems ominous. Furthermore, the ongoing legal complications and trail of some unhappy customers aren't good signs in my book either.
I can do without Trex; there are plenty more responsible companies to consider for a Foolish real-money investment. Rebut in the comments box below if you have a different take on Trex; I'd love to hear it.
Alyce Lomax has no positions in the stocks mentioned above. The Motley Fool owns shares of Green Mountain Coffee Roasters, Lumber Liquidators, and Trex. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, The Home Depot, Lumber Liquidators, Lowe's Companies, and Trex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.