Trex (TREX)

Composite decking and railing products manufacturer Trex Company (NYSE:TREX) fell short of the markets revenue expectations in Q3 CY2025, but sales rose 22.1% year on year to $285.3 million. Next quarter’s revenue guidance of $145 million underwhelmed, coming in 27.1% below analysts’ estimates. Its non-GAAP profit of $0.51 per share was 10.2% below analysts’ consensus estimates.

Company Overview

Addressing the demand for aesthetically-pleasing and unique outdoor living spaces, Trex Company (NYSE:TREX) makes wood-alternative decking, railing, and patio furniture.

Traditionally, home construction materials companies have built economic moats with expertise in specialized areas, brand recognition, and strong relationships with contractors. More recently, advances to address labor availability and job site productivity have spurred innovation that is driving incremental demand. However, these companies are at the whim of residential construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of home construction materials companies.

Other companies offering outdoor building materials and products include Fortune Brands Innovations (NYSE:FBIN), Masco (NYSE:MAS), and Azek Building Products (NYSE:AZEK)

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Thankfully, Trex’s 7.6% annualized revenue growth over the last five years was decent. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Trex’s recent performance shows its demand has slowed as its annualized revenue growth of 4% over the last two years was below its five-year trend.

This quarter, Trex generated an excellent 22.1% year-on-year revenue growth rate, but its $285.3 million of revenue fell short of Wall Street’s high expectations. Company management is currently guiding for a 13.5% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 10.4% over the next 12 months, an improvement versus the last two years. This projection is admirable and indicates its newer products and services will catalyze better top-line performance.

Trex’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 39.8% gross margin over the last five years. Said differently, roughly $39.83 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

Trex produced a 40.5% gross profit margin in Q3, in line with the same quarter last year. On a wider time horizon, Trex’s full-year margin has been trending down over the past 12 months, decreasing by 3.1 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Trex has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 25.3%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Trex’s operating margin decreased by 4.2 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Trex generated an operating margin profit margin of 24.7%, up 1.4 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Trex’s EPS grew at an unimpressive 5.4% compounded annual growth rate over the last five years, lower than its 7.6% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

Diving into the nuances of Trex’s earnings can give us a better understanding of its performance. As we mentioned earlier, Trex’s operating margin expanded this quarter but declined by 4.2 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

Trex’s two-year annual EPS growth of 1.1% was subpar and lower than its 4% two-year revenue growth.

In Q3, Trex reported adjusted EPS of $0.51, up from $0.37 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street expects Trex’s full-year EPS of $1.93 to grow 27.4%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Trex has shown impressive cash profitability, enabling it to ride out cyclical downturns more easily while maintaining its investments in new and existing offerings. The company’s free cash flow margin averaged 8.4% over the last five years, better than the broader industrials sector.

Taking a step back, we can see that Trex’s margin dropped by 6.1 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Trex’s free cash flow clocked in at $142.9 million in Q3, equivalent to a 50.1% margin. This result was good as its margin was 26.8 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Trex hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 27.6%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Trex’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Trex reported $11.36 million of cash and $147 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $342.6 million of EBITDA over the last 12 months, we view Trex’s 0.4× net-debt-to-EBITDA ratio as safe. We also see its $1,000 of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results as its revenue, EPS, and EBITDA missed Wall Street’s estimates. Its full-year revenue guidance also fell short. Overall, this was a softer quarter. The stock traded down 13.3% to $40.80 immediately following the results.

Updated: December 4, 2025 at 10:17 PM EST

Before deciding whether to buy Trex or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

We see the value of companies helping their customers, but in the case of Trex, we’re out. Although its revenue growth was decent over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s impressive operating margins show it has a highly efficient business model, the downside is its projected EPS for the next year is lacking.

Trex’s P/E ratio based on the next 12 months is 22.1x. This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $43.74 on the company (compared to the current share price of $34.11).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.