Wedbush Upgrades Trex To Outperform, Sees Gross Margin Profile Intact

• The share price of Trex Company, Inc. TREX has declined by 37.54 percent over the past three months.
• Wedbush’s Al Kaschalk has upgraded the rating on the company from Neutral to Outperform, with a price target of $45.
• With the selloff in the stock since July, Kaschalk believes that the stock valuation does not take into account the company’s current growth opportunities, while expecting 35 percent upside to the stock.

Analyst Al Kaschalk expects Trex’s core decking and railing business to achieve topline growth of 8.9 percent in 2016, driven by forecasted industry growth of 4-5 percent, market share gains of 2 percent and incremental pricing benefit of one percent.

“With potential tailwinds from mix, new products and International growth, top-line core business should top 10+ percent,” Kaschalk stated.

According to the Wedbush report, “TREX is currently operating two of its four lines within the new pellet manufacturing business.” If all four lines are used and if the operating metrics expectations are met, the company would be well positioned to achieve revenues of $25-$40 million in 2016.

If an additional four lines are added to the existing four, revenue could jump closer to $50-$80 million by the end of 2017 for the pellet manufacturing business.

In addition, although the company does buy virgin polyethylene, Trex “retains a substantial cost benefit for its procurement of polyethylene versus its competitors,” Kaschalk mentioned, while adding that this implies that the company could attain sustainable incremental gross margin of over 40 percent.

Also, the free cash flow of $50 million suggests that the company could undertake a share buyback program.