Trex TREX S
November 29, 2021 - 8:13am EST by
heffer504
2021 2022
Price: 132.00 EPS 2.11 2.58
Shares Out. (in M): 118 P/E 63 51
Market Cap (in $M): 15,600 P/FCF nm nm
Net Debt (in $M): 0 EBIT 325 395
TEV ($): 15,600 TEV/EBIT 48 40
Borrow Cost: General Collateral

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Description

I assume you all know this business-- plastic decking.  Trex has benefited from a perfect storm.  Namely:

 

1) High demand for home renovation projects, especially those that can be done without letting workmen into the home

2) High wood prices, making decking lumber (a substitute) relatively less attractive vs. plastic

3) Low financing costs and high financing availability, given the "fintech" capital tailwind and benign credit environment

4) Demand > supply, given lag until new capacity is added

 

This should all make for incredibly difficult comps next year, as demand slows and supply ramps up.  Capacity increases are significant due to incredible ROIs, and both TREX and its main competitor (AZEK) have announced that they are spending $200M to almost double their production.  Many other capacity additions have also been announced:

https://www.prnewswire.com/news-releases/oldcastle-apg-doubles-capped-decking-capacity-with-moistureshield-plant-investment-301164936.html 

 
https://www.bizjournals.com/charlotte/news/2020/05/08/local-manufacturer-fiberon-reveals-plans-for-20.html

 

https://www.businesswire.com/news/home/20191105005698/en/Fiberon-to-Increase-Production-Capabilities-at-Idaho-Facility
https://lbmjournal.com/duralife-upgrades-will-double-capacity-at-maine-facility/
 
and UFPI recently said on their earnings call:
So in 2020, our capacity really didn't come back online until probably late Q4. So we figure that will add between 30% and 35% capacity. The plan for this year, which will probably come online in 2022 will be for our mineral composite product. That should increase our capacity by about 25% and maybe as high as 30%. And then continued plans in 2022 for both those operations will include another 30% or so in our wood/plastic composite
 
Meanwhile, the market expands $50-100M per year, assuming plastic takes 1-2% of share from wood (consistent with all statement from public companies).  So, the announced capacity additions should allow for 15 years of market share growth.  And this is without TREX's recently announced new complex in Little Rock:
https://www.businesswire.com/news/home/20211026005009/en/Trex-Company-Announces-Plans-for-Third-U.S.-Production-Site
 
This is shaping up to be a market share bloodbath.  While TREX and AZEK each have around 1/3 of the market, there are a lot of big companies with small market shares, looking to grow (CRH, UFPI, FBHS), all of which are adding capacity.  If you believe that most of the demand acceleration in 2020-21 was actually pull-forward of deck replacement projects, then 2022 demand could go negative (95% of demand is for replacement, not tied to new home builds).  Lumber prices have dropped over 50% from their highs, making wood a more economical alternative again.
On the cost side, the recycled plastic that TREX uses is now in short supply, and TREX will likely have to use more expensive virgin material.  Of course, natural gas, labor, transportation, and a host of other pressures are also a concern.  TREX has operating margins in the high 20's (up from 11% 10 years ago), so there is plenty of margin to be eaten away.  
Meanwhile, Fiberon was acquired for 2.5x sales, while TREX trades for 12x.  
 
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

earnings misses starting next quarter

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