TRG | The Bottom Line – 11/11

Q3’22 earnings season is largely behind us, and as we look forward to wrapping up 2022, we take a step back to look at Q3 themes and what this means going forward. A verity we highlighted in Q1 has played out: Wall Street hates uncertainty. We wrote upon the conclusion of Q1 that we expect a continued volatile market, and the market in the near term would be focused on macro factors that could dampen activity in the later parts of the year and into 2023. YTD the S&P 500 is off 17%. Of TRG coverage, TREX has been the hardest hit (off 64%), followed by peer AZEK (off 59%), both of whom were high-flyers in the height of the global pandemic. Glob resi & non-res flooring manufacturer MHK has also been hit hard, off 44% YTD, followed by resi & office furniture manufacturer MLKN (off 41%). Going into 2023, industries with historic sticky pricing power should be relative winners. In addition, having a greater southeast/southwest U.S. geographic focus is a structural positive for several years going forward. Finally, cash is king, and relatively unlevered companies (at least from a perception standpoint), will be overall best positioned. Against that backdrop, aggregate-focused companies (VMC, MLM) bring to the table strong, sticky pricing power and favorable geographic focus. SUM also brings to the table a continued positive progress in portfolio optimization story, in addition to benefiting from favorable heavy materials dynamics.