Since 2009, Trex (TREX -0.93%) has delivered total returns of roughly 3,200% despite being tied to the highly cyclical United States housing industry. Manufacturing composite decking, railing, and adjacent products since 1998, Trex rapidly grew to become the leader in the $8 billion market.
However, despite these incredible returns over the last 15 years, the company's share price has dropped 52% from its all-time highs set in 2021.
Following a boom in remodeling and restoration fueled by low interest rates and homeowners spending more time at home during the lockdown, Trex is now facing more challenging times.
Ultimately, though, the company has a number of long-term tailwinds working in its favor, making its near decade-low valuation attractive. These factors, paired with a number of catalysts set to tip in Trex's favor, may make it a once-in-a-decade opportunity today.
Here's the case for buying and holding Trex for decades.
Trex: The leader in composite decking
Using a blend of 95% reclaimed wood fibers and recycled polyethylene film, Trex's composite decks are not only created without felling trees but also require less maintenance and last roughly twice as long as traditional wood decks. This value proposition from Trex's eco-friendly offerings resonated with homeowners right away, quickly catapulting the company into a leadership position in the U.S. decking and railing industry.
Currently leading with a 13% market share of its industry niche, the company is bigger than its next two competitors combined. In fact, Trex commands over 60% of the web traffic generated by consumers searching for deck options, thanks to its Trex.com and Decks.com domains.
Furthermore, the company believes it holds a No. 1 position in its decking niche across the following areas: "trust, consumer awareness, consumer search, traffic, social media, sales, and market share."
Despite this leadership advantage in the decking industry, Trex's growth story is far from over. Currently, composite or wood alternatives like Trex only account for 24% of the decking market as a whole, with wood making up the other 76%. This leaves a long runway for continued conversions from wood to composite decks, which management estimates will shift by roughly 1.5 to 2 percentage points annually over the longer term.
One final tailwind working in Trex's favor is that management believes roughly 50% of the 60 million decks in the U.S. are in need of updating, leaving even more room for conversions.
4 reasons Trex may be a once-in-a-decade opportunity right now
In addition to these longer-term tailwinds, here are four shorter-term catalysts that look poised to propel Trex's share price higher.
1. Lower interest rates are here
With the Fed recently cutting interest rates by 50 basis points, Trex could start to see increased buying activity from homeowners thanks to lower borrowing costs. Since 2000, the company's sales and the Fed's rates have tended to move in opposite directions, highlighting the cyclical nature of its stock.
TREX Revenue (TTM) data by YCharts
While it is impossible to predict exactly what will happen as a result of the recent rate cuts, they shouldn't harm Trex's operations in any way.
2. Improving consumer sentiment
Currently, the U.S. Index of Consumer Sentiment (ICS) is registering at 69, which is well below the indicator's historical average of 85. Measuring "how consumers are feeling about spending and their future expectations for the economy," the index acts as a leading indicator for consumer spending. Since 2000, when the ICS has been below 85, Trex's sales have historically leveled off or even dipped.
TREX Revenue (TTM) data by YCharts
However, since bottoming out at 46 in 2023, the ICS has gradually improved to its current mark -- alongside Trex's restarted revenue growth. This improving indicator, now paired with lower interest rates, could combine to be just enough fuel to get Trex's growth engine roaring again.
3. International sales and new products
In addition to the potential sales remaining for Trex to convert wooden decks to composite, the company is still very early on in its international expansion plans. While the company holds 12%, 7%, and 4% market shares in the U.K., Germany, and France, it only has 1% or lower in the remaining 37 foreign countries it sells to, leaving a massive remaining growth runway outside of the U.S.
Meanwhile, the company's expansion into the $3.3 billion railing market and $250 deck fastener category brings additional sales growth potential. Last but not least, earlier in 2024, the company launched its Trex Signature line of realistic-looking wood-grain decking, which is its first luxury-priced offering. While it is still very early innings for this line, a focus on high-end homeowners could help reduce the inherent cyclicality in Trex's sales.
4. Valuation
While these three short-term catalysts pair nicely with the long-term tailwinds working in Trex's favor, the market continues to take a cautious stance towards the company's stock, leaving it to trade well below its 10-year averages.
TREX PE Ratio data by YCharts
This price-to-earnings (P/E) ratio of 28 is in line with the S&P 500's average of 27 and isn't a bad price to pay for a company that has grown sales and net income by 13% and 21% annually over the last decade.
This history of proven growth, paired with the short-term and long-term catalysts mentioned earlier, gives Trex the potential to be a once-in-a-decade opportunity at today's valuation.
