Trex Gets A Downgrade From Wedbush, As Share Price Exceeds Price Target

Trex Company, Inc. TREX shares have appreciated 49.7 percent year-to-date and are now trading at a 30.9 percent premium to peers.

Wedbush’s Al Kaschalk downgraded the rating on the company from Outperform to Neutral, while raising the price target from $50 to $53.

“the benefits of operational improvements, sales mix and raw material tailwinds have been largely captured in the share price bringing the risk/reward to neutral,” Kaschalk said.

Guidance Raised

Although the company guided to 2H:CY16 to benefit from continued robust incremental gross margin (IGM) and average of 80 percent for CY16, the analyst expects the IGM to decline to the 40–50 percent range as early as 1Q:CY17.

Related Link: Trex Corp Q2 EPS Beats Expectations, Sees Q3 Revenues Up Double-Digits

Over the medium term, Kaschalk expects Trex to continue to add to its market leading share in the decking & rail segment of the outdoor living market, while benefiting from “the secular change from wood to wood-alternative materials,” as well as contribution from a “developing International market” and robust conversion of operating cash flow to free cash flow to fund R&D investment and its share buyback program.

“However, despite these positives, we now see reduced opportunity for TREX to exceed expectations and related earnings estimates,” the analyst said.

2Q Results

Trex reported its 2Q revenue, EBIT and adjusted EPS<?a> ahead of the estimates. Volume, mix and a slight improvement in price led to the better-than-expected revenue.

Gross margin also beat the estimate, driven by lower input costs, improved capacity utilization and cost efficiency initiatives.