Trex (TREX)

Composite decking and railing products manufacturer Trex Company (NYSE:TREX) reported Q1 CY2025 results beating Wall Street’s revenue expectations, but sales fell by 9% year on year to $340 million. Its GAAP profit of $0.56 per share was 4.1% 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)

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Trex grew its sales at a decent 7.8% compounded annual growth rate. 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 5.4% over the last two years was below its five-year trend.

This quarter, Trex’s revenue fell by 9% year on year to $340 million but beat Wall Street’s estimates by 3.5%.

Looking ahead, sell-side analysts expect revenue to grow 10.8% over the next 12 months, an improvement versus the last two years. This projection is noteworthy and suggests 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 39.7% gross margin over the last five years. That means Trex only paid its suppliers $60.32 for every $100 in revenue.

Trex produced a 40.5% gross profit margin in Q1, marking a 4.9 percentage point decrease from 45.4% in the same quarter last year. Trex’s full-year margin has also been trending down over the past 12 months, decreasing by 2.3 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 one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

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 24.5%. 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 2.2 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.

In Q1, Trex generated an operating profit margin of 24%, down 7.8 percentage points year on year. Since Trex’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

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 6.5% compounded annual growth rate over the last five years, lower than its 7.8% 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.

We can take a deeper look into Trex’s earnings to better understand the drivers of its performance. As we mentioned earlier, Trex’s operating margin declined by 2.2 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Trex, its two-year annual EPS growth of 14.8% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q1, Trex reported EPS at $0.56, down from $0.82 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Trex’s full-year EPS of $1.82 to grow 23.8%.

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 decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 6.1% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Trex’s margin expanded by 9.8 percentage points during that time. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Trex burned through $79.49 million of cash in Q1, equivalent to a negative 23.4% margin. The company’s cash burn slowed from $211.8 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared 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 26.9%, 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. Over the last few years, Trex’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Trex reported $4.96 million of cash and $483.7 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 $323.1 million of EBITDA over the last 12 months, we view Trex’s 1.5× net-debt-to-EBITDA ratio as safe. We also see its $81,000 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 were impressed by how significantly Trex blew past analysts’ revenue expectations this quarter. On the other hand, its EPS missed and its EBITDA fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 1.4% to $57.50 immediately after reporting.

Updated: May 16, 2025 at 11:21 PM EDT

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

Trex’s business quality ultimately falls short of our standards. Although its revenue growth was decent over the last five years and is expected to accelerate over the next 12 months, 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 cash profitability fell over the last five years.

Trex’s P/E ratio based on the next 12 months is 27.5x. This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $68.17 on the company (compared to the current share price of $60.83).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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