TRG | The Bottom Line – 5/12

Covid stock darling, recycled composite decking, railing and outdoor item manufacturer Trex Company (TREX), fell 70%+ from its peak in late 2021 to its nadir roughly a year later. TREX this past week reported earnings, and TREX is another example of stocks rallying on “less bad” news. Q1 results were in-line, Q2 guide is above our pre-release estimates, and FY’23 outlook is consistent with management’s prior outlook. Investors applauded results (stock up 9% the day after results released) for multiple reasons: 1) Trex has seen flattish sell-through in Q1 and expects Q2 to be flattish or slightly down. 2) Trex expects Q2 sales of $310-320MM and is still planning on $1B of production for FY’23, in line with TRG forecast. 3) The company has improved its cost structure in the slower period and gross margin in Q1 outperformed nicely and should exceed 40% in Q2. As such, the expectation is gross margins come near the high-end of the originally guided 37.5-38.0% for FY’23. 4) Trex is producing for $1B of sales and expects EBITDA margin of ~26-27%, with fairly consistent margins through the year. Note that 2H’23 still has questions due to consumer strength, which is why the dealer channel is still running lite on inventory despite contractor demand being solid with fairly normalized backlogs. Q4’23 will also be a swing factor that depends on macro and consumer strength, and dealer/distributor willingness to stock inventory to prepare for the busy season of 2024.