A Pair Trade In Building Materials From B. Riley FBR: Buy Trex, Neutral On BMC

The building materials sector is often overlooked by investors, but doing so would be a mistake with a stock like Trex Company Inc TREX gaining nearly 80 percent over the past year and outperforming all five members of the "FAANG" group.

The Analyst

B. Riley FBR's Alex Rygiel upgraded Trex's stock from Neutral to Buy with a price target boosted from $96 to $125. The analyst also downgraded BMC Stock Holdings Inc BMCH from Buy to Neutral with a price target raised from $25 to $26.

The Thesis

The corporate tax cut signed by President Donald Trump will result in a lower tax rate for the building material companies under B. Riley FBR's coverage, Rygiel said. (See the analyst's track record here.) 

While there is some uncertainty around stock-based comp destructibility and the revaluation of deferred tax assets and liabilities, Rygiel said the multiple companies in the group will likely see an increase in their 2018 earnings per share. Some of the building material companies operate internationally, so the degree of benefit will vary by company, and some building material names won't see a significant boost, he said. 

Trex

Trex is an industry leader in wood alternative decking and railing systems in the U.S. and will see a "favorable" reduction in its corporate tax rate, the analyst said. Trex will likely benefit from "significant exposure" to consumer discretionary spending, Rygiel said. This creates a scenario where 13-percent sales growth in 2018 and 33-percent EPS growth could prove to be conservative, he said.

BMC

BMC is a large distributor of lumber products in the U.S. and will likely benefit from corporate tax reform, the analyst said. A downgrade is warranted given BMC's stock valuation relative to its peers, Rygiel said. 

Price Action

Shares of Trex were trading down 3.47 percent in the afternoon session, while BMC was down 0.31 percent. 

Related Links:

Global Construction Materials Market 2017-2021: Driven by the Increase in Number of Smart Cities - Research and Markets

Pro: 4 Stocks Could Benefit From Trump's Infrastructure Plan