Trex Company: Choppy Quarters Ahead But The Trend Is Upbeat, Says Analyst

Truist Securities analyst Keith Hughes reiterated a Buy rating on Trex Company, Inc. TREX, raising the price target to $80 from $65.

The company recently reported second-quarter earnings where stronger-than-expected sales performance demonstrates resilient consumer demand.

The analyst noted that Decking is one of the few residential products in the coverage that is seeing growth in Q2.

The company introduced its view for third-quarter net sales of $280-$290 million (above Street view).

Guidance for 3Q23 shows a return to growth, but management expects channel fill to be pushed into 2024, causing a weaker 4Q23, Hughes cautions. Also, the 3Q23 implied EBITDA margin will be 350 basis points below 2Q23 implied growth year over year, the analyst notes. 

Yet, the analyst adds that continued good demand and macroeconomic news could change this more conservative view by customers in the coming months. While choppy quarters are ahead of the company, the trend is upbeat.

Hughes believes that TREX and the industry are headed toward growth in 2024. 

For 4Q23, the analyst notes that the implied guide is notably softer than Street expectations, and although management notes that the channel is remaining cautious, the consumer is still resilient. 

In 4Q23, the company estimates that channel inventories are below normalized levels and that net sales will be a $60-$80 million benefit from typical channel restocking, Hughes adds. Management expects channel conservatism to push this restocking benefit out to early 2024.

After the Q2 results, the analyst raised the 2023 EBITDA estimate to $304 million from $283 million and boosted the 2024 estimate to $350 million from $323 million.

Price Action: TREX shares are trading higher by 8.6% to $75.10 on the last check Tuesday.