Wall Street is showing interest in Trex (NYSE:TREX) these days, even if it's not all bullish. Sidoti reinitiated coverage on the leading maker of wood-alternative decking materials today, setting a price target of $45 on the shares.
That's the good news. The bad news is that the stock closed at $44.13 yesterday, so Sidoti is suggesting that there's just 2% of upside from here. It's tagging the stock with a neutral rating.
Sidoti's move comes less than three weeks after FBR Capital reiterated its bullish outperform rating on Trex, and its $50 price target. FBR Capital's higher price target also came when the shares were trading slightly lower than they are now.
There's no need to walk the plank
The FBR Capital note came a week after Trex delivered another quarter of robust growth. Net sales clocked in at $132 million. That may be just 9% ahead of the prior year, but more than the $131 million that it was offering up in guidance earlier this year.
It may be decelerating growth -- Trex has come through with four consecutive years of double-digit percentage sales growth -- but improving margins helped prop up net income 33%, to $23.4 million. Aggressive share buybacks during the past year helped improve profitability on a per-share basis, up 42%, to $0.78 a share. Analysts were only holding out for $0.67 a share, making this the second quarter in a row that Trex has beaten Wall Street's profit targets by double digits.
FBR Capital's bullish note last month emphasized Trex's improving market share and gross margin. Trex's popularity for outdoor decking projects is growing as customers consider the durability relative to the product's higher cost. Margins, in general, have been improving as a result of lower materials cost and healthier manufacturing efficiencies.
Deceleration on the top-line is likely to continue. Trex sees revenue growing 8%, to $145 million, during the current quarter, and analysts see 7% revenue growth for all of 2016.
The news is better on the bottom line. Analysts are forecasting a 28% uptick in earnings per share this year.
There will be conflicting opinions on where Trex stands as an investment. It trades at 20 times this year's adjusted earnings. That may seem high based on its slowing revenue growth, but low based on its recent earnings growth.
Trex is also vulnerable to the housing market. Folks may not be as tempted to upgrade their outdoor living spaces if they feel that home prices are heading lower, and their home mortgages may be underwater. It's not a coincidence that the recent years of growth have happened in conjunction with the buoyant real estate market.
One analyst still feels Trex has room to run; one does not. That's what makes the market a market.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.