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Trex Earnings Lag Estimates, Up YoY

Zacks Equity Research

Trex Co. Inc. (TREX) reported record second-quarter 2013 adjusted earnings of 86 cents per share, up 46% from the year-ago adjusted earnings of 59 cents. The results however fell short the Zacks Consensus Estimate of $1.01.
Including charges of 10 cents per share related to the mold class action, earnings came at 76 cents a share. However, prior-year quarter’s earnings including warranty reserve cost and severance charge of 11 cents were 48 cents.

Operational Update

Total revenue improved 4.5% year over year to $98.6 million but missed the Zacks Consensus Estimate of $104 million. The improvement was driven by a shift in sales mix to high-performance decking and railing products.
Cost of sales increased 1.5% year over year to $61 million. Gross profit grew 9.9% year over year to $36.9 million. Gross margin improved 180 basis points (bps) to 37.5% aided by lower sales-related cost, reduced start-up cost and favorable capacity utilization.
Selling, general and administrative expenses increased 12% to $23 million from $20.1 million in the year-ago quarter. Operating profit increased 6% year over year to $13.5 million. Consequently, operating margin expanded 20 bps to 13.7%.
Financial Updates

As of Jun 30, 2013, cash and cash equivalents were $15.5 million versus $2.1 million as of Dec 31, 2012. Cash from operating activities for the first half of 2013 was $23 million compared to $35.9 million in the same period of the prior-year.


For the third quarter of 2013, Trex expects sales of $72 million, indicating an increase of 2% over 2012. The reduction in capacity utilization from the second to third quarter will be more than the prior year and will push third quarter gross margin below last year's level. SG&A spending will likely be down more than $1 million from the prior-year quarter.

The company has initiated a stock repurchase program for the first time. It will buyback shares of up to $25 million over six-month period. This will also contribute to long-term growth demonstrating a healthy cash flow and balance sheet.

Our Take

Trex’s strategy of offering a full line-up of best-in-class, high-performance decking and railing products this year has been effective so far. These products offer a higher level of fade, scratch and stain resistance. In addition, with expanded high-performing platforms, the company will able to attract more consumers.

Trex’s decision to go beyond the WPC market and offer products that compete in the PVC and aluminum railing segments is also showing early signs of success. The company now offers an unparalleled portfolio of 1,200 different decking and railing combinations. It also offers a number of design tools to help contractors and consumers visualize their decking and railing options.

Trex is also expanding internationally. Moreover, the company will likely be benefited by its share repurchase program, strong financial condition and better rapport with distributors, dealers and contractors.
Winchester, Va.-based Trex Company, Inc. manufactures and distributes wood/plastic composite products and related accessories, primarily for residential and commercial decking and railing applications in the United States. The stock currently retains a Zacks Rank #3 (Hold).

Other companies in the building and construction industry with favorable Zacks Rank are James Hardie Industries plc (JHX) and Masco Corporation (MAS) which retain a Zacks Rank #2 (Buy). One of Trex’s peers Aegion Corporation (AEGN) reported second-quarter adjusted earnings from continuing operations of 47 cents per share, up 57% from 30 cents in the year-earlier quarter. The results surpassed the Zacks Consensus Estimate of 38 cents.

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