Trex Falls on Earnings Miss - Analyst Blog

Shares of Trex Co. Inc. TREX plunged 11% following the company's first-quarter 2014 earnings of 73 cents on May 5, which marked a year-over-year decline of 42%. The reported figure also fell short of the Zacks Consensus Estimate of 96 cents by 24%.

First-quarter results reflected a $7.1 million increase in income taxes due to resumption of the normal tax rate after exit from the tax valuation allowance at year-end 2013. The increase in taxes accounted for almost 80% of the year-over-year fall in earnings. Adverse weather also affected earnings in the quarter.

Operational Update

Total revenue decreased 6.7% year over year to an adjusted $100.6 million, missing the Zacks Consensus Estimate as well as management guidance of $115 million. The decline was mainly due to a severe winter experienced throughout the country, which delayed the start of outdoor living project activity.

Cost of sales decreased 5% year over year to $62.5 million. Adjusted gross profit declined 9% to $38.2 million. Gross margin contracted 90 basis points (bps) to 37.9%.

Selling, general and administrative expenses decreased 8% to $18.2 million. Operating income in the reported quarter was $19.9 million against $22 million in the year-ago quarter. Operating margin contracted 60 bps to 19.8% in the quarter.

Financial Update

Trex ended the first quarter with cash and cash equivalents of $3.7 million, flat as compared with 2013-end. Cash flow used in operations was $82 million in the reported quarter versus $66 million in the prior-year quarter.

In Feb 2014, Trex announced a two-for-one stock split of its common stock. The stock split will be in the form of a stock dividend to be distributed today to shareholders of record at the close of business on Apr 7, 2014.

Outlook

For the second quarter of 2014, Trex expects sales of around $125 million, which marks an increase of 27% from the second quarter of 2013.

Our Take

Trex will benefit from the ongoing economic recovery. Additionally , the company's consistent focus on industry-leading distribution presence, best-in-class product platform, low-cost manufacturing and brand will drive growth.

Moreover, Trex's strategy of offering a wide range of high-performance decking and railing products has so far been successful. These products offer a higher level of fade, scratch and stain resistance. Moreover, with the growth of high-performing platforms, Trex will be able to attract more consumers.

During this year, Trex plans to continue with the high-profile Engineered Artistry branding campaign launched last year. Moreover, macroeconomic indicators, including rising consumer confidence and the strengthening home remodeling market bode well for the company.
 
Winchester, VA-based Trex manufactures and distributes wood/plastic composite products and related accessories, primarily for residential and commercial decking as well as railing applications in the United States.

Currently, Trex carries a Zacks Rank #5 (Sell). Some better-ranked stocks in the sector include Simpson Manufacturing Co., Inc. SSD, United Rentals, Inc. URI and Aegion Corporation AEGN. While Simpson Manufacturing and United Rentals sport a Zacks Rank #1 (Strong Buy), Aegion has a Zacks Rank #2 (Buy).