Despite having posted strong fourth quarter sales and earnings, and having guided an encouraging 2015, Trex Company, Inc. TREX saw its stock downgraded at Stifel on Wednesday morning, from a Buy to a Hold, on its valuation. Trading above $48, surpassing Stifel’s most recent target price of $46, the valuation “looks stretched,” the firm says.
Despite the demotion, the research firm boosted its EPS and revenue estimates for fiscal 2015 and fiscal 2016. It 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 the stock at 14.5x EBTIDA estimate. The report states that, while the analysts “see the potential for EBITDA to expand to as much as $110-115 million,” they would note “a still high multiple on that earnings level,” since building products peers are trading closer to 10-11x one year forward EBITDA. The specialists “believe that Trex is deserving of some premium, but in order to justify a Buy rating at these levels, we [the analysts] would not be comfortable with the necessary multiple on our estimate to get to 10-20% upside.”
On top of the full valuation, Stifel is concerned about the “longer range opportunity for the commercial polyethylene business. 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.”
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