Trex Company (TREX) is the largest manufacturer of decking and railing products, made from a wood alternative in the United States. The company was incorporated in Delaware in 1998, and is headquartered in Virginia. After it completed its initial public offering in 1999, it entered The Value Line Investment Survey in 2001. Trex products are available in more than 29 countries around the world, and the entity employs over 590 full-time employees. Sales reached over $340 million in 2013, a record high for the corporation. After suffering a deep decline in business through the 2007-2009 recession, the company has rebounded, helped by partnerships with strong brands, such as Home Depot (HD – Free Home Depot Stock Report), innovative products, and an improving housing market. As these trends persist, the company should be able to continue growing.
The origins of Trex start with the creator, Roger Wittenberg. He wanted to find a more environmentally friendly material, which was created by combining sawdust and shredded plastic bags. This technology was acquired by Mobil Chemical Co., and separated from Mobil Corp. prior to its merger with Exxon Mobil (XOM – Free Exxon Stock Report). This acquisition led to the rebranding of the material into Timbrex. Mobil refocused the material for use in the residential decking market, and shortened the name to Trex in its rebranding. Eventually, Mobil executives completed a leveraged buyout of the decking assets, spinning off Trex. In the bull run of the late 1990s, the company launched an initial public offering, which paved the way for expansion of manufacturing facilities.
The product has taken off due to its advantages over all-wood decking alternatives. It has higher resistance to rot, which can increase its usable life. In a buyer’s comparison with wood decking, the material could save the homeowner money over the longer term by needing less replacement than wood that has deteriorated in an outdoor environment. Trex decking has advantages against insects and moisture, and was designed to be splinter free. Though the original patent warns that it may not be as load-bearing as wood, it is advantageous for outdoor decking.
The company’s leadership position in this niche market can be attributed to several factors. The company has innovated the product to provide longer durability and nicer aesthetics than wood, with different brands hitting a wide variety of price points. Too, Trex has a strong brand name, which has been fortified through many years of positive customer experiences. The product has wide reach as it is an offering in both of the largest homebuilding retail supply stores in Home Depot and Lowe’s (LOW), as well as across a wide network of distributors and retail companies. Lastly, as the company has used waste wood fibers and reclaimed polyethylene in its products, it is able to keep costs down, allowing the company to provide better value for its customers.
Competition exists, however. In addition to other wood-alternative manufacturers, the company competes with wood decking. The railing competitors tend to use metal glass and other materials, as well. Wood tends to be the strongest area of competition, as yellow pine and fir wood are pressure-treated, allowing for longer product lives. The principal competitors include publically traded Advanced Environmental Recycling Technologies, Inc. (AERT), and Azek Building Products, Inc., and Fiber Composites, LLC. Trex’s size and three manufacturing plants located in Nevada, Mississippi, and Virginia deliver economies of scale. Too, its geographic diversity allows the company to lower shipping costs.
Still, the stock has been subject to wide price swings over the course of its history. The latest recession caused a large slide in Trex Co. shares, with the price hitting a low of $5.11 in the depths of the financial and economic crisis, as revenues took a large hit. The company, and its stock, since have rebounded, and the share price has been as high as $86.56 in the recent months. Rebounds in both housing and the economy have contributed to revenue growth at the company, allowing earnings to grow.
Though the company has never been one to pay a dividend, management recently has returned cash to shareholders through stock repurchases. This has contributed to a lower share count, which ought to boost earnings per share, and returns on equity. All told, these trends augur well for longer-term share net. Note also that the company will be splitting its shares through a stock dividend on May 7th. This should provide added market liquidity for shareholders once completed.
Trex Co. has rebounded as a company, providing a springboard for its share price to reach new highs. The company’s strong competitive advantages in an expanding market have helped push the top line further. Shareholder returns have been strong since the recession as well. For more information, please look at The Value Line Investment Survey.
At the time of this article’s writing, the author had positions in: HD, XOM