Trex (NYSE:TWP) delivered what appears to be a major disappointment to investors today, forecasting a nasty loss for the second quarter and a rather abysmal outlook for the year. Investors chopped a nearly 30% chunk out of the share price -- but are they overreacting?
The company, which makes a nifty recycled-plastic-and-wood composite for decking -- it's eco-friendly and easy to maintain -- said that second-quarter earnings will come in at a net loss of $0.20 to $0.25 per share, as compared with net profit of $0.75 per share in the year-ago quarter. Revenues will fall as well, coming in between $75 million and $80 million; last year they were $83.4 million.
For the year, Trex now expects net sales between $270 million to $280 million and earnings per share between $0.50 and $0.60. The company's previous 2005 guidance called for net sales between $300 million and $310 million and earnings between $2.16 and $2.23 per share. For 2004, Trex reported net sales of $253.6 million and earnings of $1.83 per share.
Trex blamed the weather for delaying the decking season. In addition, the company's expanded rollout of decking materials with home improvement giant Home Depot (NASDAQ:HD) hasn't gone as quickly as originally believed. Increased raw materials costs are taking their toll on profits, and second-quarter SG&A (selling, general, and administrative) expenses are always high, given Trex's ongoing brand-building efforts.
This is, of course, a huge disappointment. Trex, a Motley Fool Stock Advisor pick, certainly nailed it in the fourth quarter, although the first quarter began to warn of worries to come. Meanwhile, a check of our Trex-dedicated discussion board on the Stock Advisor site reveals concerns, such as management's reassurance on guidance several months ago and recent insider stock sales.
Trex admitted the lower guidance was disappointing, but management said in a conference call that fundamentals of its business remain strong. The composite decking and railing market is expected to grow more than 20% in the next five years.
Times of shareholder uncertainty and disappointment can certainly allow investors to pick up shares of a beleaguered stock at a reduced price. And for the long term, a company with such a "green" element -- a powerful marketing tool these days -- has a lot going for it, given its exciting and innovative solution to decking. For long-term investors, this stock may look tempting, but that approach requires caution. There are questions and risks to keep in mind, especially with what looks like a very slow and difficult year to come.
We've assembled recent Foolish coverage of Trex:
- Last quarter, Trex nailed it.
- Revisit when Trex was all decked out.
- For a while there, Trex and its competitors were just lumbering along.
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Alyce Lomax does not own shares of any of the companies mentioned.
