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Why Was Trex Downgraded After An Earnings Beat? These Analysts Explain

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Despite strong fourth quarter sales and earnings, Trex Company, Inc. (NYSE: TREX) was downgraded at Stifel on Wednesday morning, from a Buy to a Hold.

Trading above $48, the valuation “looks stretched,” analysts wrote.

Despite the downgrade, the firm boosted its EPS and revenue estimates for fiscal 2015 and fiscal 2016. Stifel now expects EPS of $1.82 (up from $1.61) for 2015, and $2.34 (up from $2.00) for 2016. Revenues are projected at $464.3 million (up from $455.9 million) for 2015, and $539.3 million (up from $525 million) for 2016.

The firm is modeling EBITDA of $105 million, which puts shares at a 14.5x EBTIDA estimate.

While analysts “see the potential for EBITDA to expand to as much as $110-115 million,” they noted that Trex is still trading above most peers on a one year forward EBITDA basis.

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"[We] believe that Trex is deserving of some premium," Stifel explained, "but in order to justify a Buy rating at these levels, we would not be comfortable with the necessary multiple on our estimate to get to 10-20% upside.”

Stifel is also concerned about the longer-term portrait of the commercial polyethylene space. "The main thesis behind that business is offering commercial polyethylene users a cost advantage by combining virgin material with Trex’s recycled material.

"With oil prices driving virgin polyethylene costs down, the cost advantage narrows somewhat," they concluded.

Latest Ratings for TREX

May 2018Sidoti & Co.UpgradesNeutralBuy
May 2018B. Riley FBRMaintainsBuyBuy
Feb 2018Stifel NicolausMaintainsHoldHold

View More Analyst Ratings for TREX
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