Can Trex Keep Going After Last Week's 20% Pop?

By Markets Fool.com

Image source: Trex.

Continue Reading Below

We're getting fancy when it comes to sprucing up our patios, andTrex (NYSE: TREX)is a major beneficiary. The leading maker of wood-alternative decking materials soared 19.85% last week, fueled higher after posting better-than-expected financial results.

Net sales rose 13% to $106.2 million.After back-to-back quarters of single-digit top-line growth, we're seeing net sales moving at a double-digit clip again.Reported earnings nearly doubled, and if we back out one-time reserve charges related to legacy products, we see earnings per share soaring 96% to $0.45 a share. Analysts were only holding out for an adjusted profit of $0.42 a share, but the beat shouldn't come as a surprise. Trex has landed ahead of analyst bottom-line targets every single quarter over the past year.

Trex has been on a growth tear in recent years. It initially benefited from the recovery in the housing market, giving folks with underwater mortgages the freedom to build out decks without the fear of banks taking over their properties. There's also been a flight to quality, and that also works in Trex's favor. Its products usually cost more than conventional wood decking, but Trex's products are more durable against the fickle and sometimes unforgiving weather-related wear and tear on outdoor living areas.

Shareholders have been the biggest winner here. The stock has more than quadrupled over the past four years.

Hitting the deck

Continue Reading Below

Trex has come through with double-digit growth in net sales for four consecutive years, but that streak will probably end in 2016. Despite the third quarter's rosy showing, net sales through the first nine months of 2016 have risen by just 9%.

A strong holiday quarter would be enough to push into its fifth consecutive year of double-digit top-line growth, but Trex doesn't see it that way. It's eyeing $93 million in net sales, a mere 4% advance. This isn't as alarming as it may sound. Net sales soared a hearty 20% during last year's fourth quarter, bringing Trex's two-year growth rate this holiday quarter up to nearly 25%.

The news gets more encouraging as we work our way down the income statement. Margins have been improving all year, and Trex sees that continuing to happen during the current quarter. It didn't initiate its outlook for 2017, but it sees healthy momentum as 2016 comes to a close. Trex feels that it will continue to gain market share.

Trex will naturally continue to be at the mercy of the housing market. It's gaining share in a growing market, and it's easy to see where a deteriorating real estate market or a spike in mortgage and refinancing rates could slow things down at Trex. For now the market darling is doing exactly what growth investors expect, making the most of the opportunity to deliver a record number of its premium products to consumers. Investors just need to keep an eye on this trend to spot the early signs when the playing field starts to change.

10 stocks we like better than Trex
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Trex wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 7, 2016

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Trex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.