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Insane lumber prices are supercharging Trex’s composite wood business—and making it a top-performing stock

May 29, 2021, 10:00 AM UTC

If you were trying to invent the best blend of features to enhance your home for post-pandemic living, they’d probably include outdoor space, lumber-less, and green. That’s the hit package offered by Trex, America’s largest manufacturer of composite decking that it fashions from recycled plastic grocery bags and dry cleaning wrap, and wood chips swept from floors of furniture factories. Last year as Americans’ houses became their offices, gyms, and home schooling centers, families prized adding the open air dimension to their manses as never before. Sales of decks exploded, but overnight, the soaring price of lumber gave the composite versions a big edge over wood. In twelve months, the cost of a wooden deck spiked to nearly equal that of Trex models that don’t stain, you can wash with a hose, and if you drop a cement block enroute to redoing the garage, won’t show a dimple of a dent.

Trex, a three-decade-old Virginia stalwart, controls half the composite market, a share twice that of its closest competitor. It’s been posting numbers more typical of a software or biotech star than an old-line manufacturer. Last year, its revenues vaulted 18% to $881 million, followed in Q1 by a 23% year-over-year jump, and for Q2, CEO Bryan Fairbanks forecasts a gain of 36%. Over the past five years, Trex’s shares have vaulted from $11 to $97 delivering a 767% total return. That record is the 24th highest in the S&P 1000.

The other top performers are mainly young electronics and healthcare players. Trex is virtually the only one in the first twenty-five that manufactures a final product that isn’t apparel in its own factories. It now boasts an $11.2 billion valuation––a number that’s astounding for Trex’s modest size. The reason: Wall Street’s awarded Trex a vertiginous price-to-earnings multiple of sixty-one, meaning investors expect go-go growth in the years to come.

An essential industry

During the dark days of the pandemic, Trex was free to keep producing at full tilt. Virginia and Nevada, the states where its plants are located, deemed construction materials an essential industry. Its factories are still operating at maximum capacity. “We can sell as much as we can make,” says Fairbanks. “We’ve been growing much faster since the crisis began by taking lots of market share from wood.” He notes that pre-COVID, composite was already gaining on lumber. In the five years through the close of 2019, sales of composite decks grew at double the 7% to 8% pace of the overall market. That enabled the recycling-forged extensions to raise their market share in that half-decade from around 17% to 22%.

Now, Fairbanks expects composite to grab an remarkable extra two points more this year, raising its slice to almost one-quarter. “Every point we take from wood means an extra $50 million or some 5% in sales for Trex,” observes Fairbanks. Traditionally, consumers were willing to pay a lot more for composite than lumber, chiefly because the former is more durable, lasting well past 25 years versus ten to fifteen for wood. Even so, Trex was already advancing on the rivals offering those pressure-treated planks harvested from trees.

What’s giving Trex that extra firepower is the shrinking price gap with wood. From 2018 to April of 2021, the cost of lumber doubled as the boom in home sales forced, and continues to press builders to bid ever higher for wood roofing and siding. Before COVID-19 struck, customers were paying roughly $600 for a 16 by 20 foot (320 square foot) wood deck, half the $1,200 for the most basic Trex offering. (The biggest cost is installation, running for a product that size at just over $10,000.) Today, Trex’s price hasn’t budged, but wood’s gotten almost as expensive, rising two-fold to $1,100. Put simply, a composite deck that a year ago sold at twice the price of wood now goes for just 10% more.

The divergence widens as decks get fancier, but it’s still far narrower at the upper-end than pre-crisis. Two years ago, Trex’s top Transcend brand at $3,000 was five times as expensive as a deluxe wooden deck. Now, folks can barbecue overlooking the pool on a Trescend that’s still at that price, while an upscale wood model at $1,000 isn’t nearly the bargain of two years ago, when it cost just $600.

Recycled and reclaimed

Trex traces its beginnings to 1988, when an entrepreneur blended sawdust with recycled plastic bags to create a park bench. In 1996, oil and chemicals colossus Mobil purchased the technology to channel its excess production of polyethylene, the feedstock for plastics, into producing industrial flooring and decks under the newly-created Trex brand name. After the tiny venture floundered inside the energy behemoth, the management team, along with a small group of investors, purchased Trex and shortly thereafter, took it public in 1999. As an independent enterprise, Trex shifted from the business to home repair and remodel market, source of over 90% of its today’s sales.

Trex makes its decks almost entirely using a two materials that is buys as waste from other businesses, used plastic––primarily from packaging––that that it “recycles,” and discarded wood that it “reclaims.” It contracts with truckers all over the country that pick up the waste from over 2,000 businesses. They collect “stretch film” that wraps entire pallets of soda cans or smoke detectors, plastic shopping bags, and pill bottles from the stores and distribution centers operated by suppliers as varied as Home Depot, Walmart, Macy’s, Best Buy and CVS. “Their employees tear off the stretch film and throw it into balers, and our contractors pick it up and load it onto trucks,” says Fairbanks. Trex funnels the waste to warehouses near the plants in Virginia and Nevada, and from there to the production lines.

Trex forges national purchasing agreements for those byproducts with chains such as Albertsons, and partners with retailers, pharmacies and home supply outfits across cities and regions. Fairbanks reckons that amassing the polyethylene that America’s dumping as waste plastic costs one-third of what Trex would pay for the “virgin” chemical bought directly from a producer. Last year, Trex recycled no less than one and a half billion plastic bags, and diverted 400 million pounds of discarded plastics from landfills. Its role as a giant recycler burnishes its image. “People won’t trade quality or aesthetics just to buy green, but they definitely like our decks because of our green heritage,” says Fairbanks.

Plastics comprise approximately half the raw materials in a Trex deck. The balance is wood, not lumber, but sawdust, chips, shavings, and broken pallets that it collects from lumber yards, home improvement outlets, and stair and railing manufacturers. In the plants, the wood shards are ground into fine particles. The plastic waste and wood particles are combined, mixed with pigments and preservatives, and the blend is heated. Then, the materials run through an extrusion machine that shapes them into composite planks.

Surprisingly, homebuilders deliver the vast bulk of new homes sans decking. Says Fairbanks, “Ninety-five percent of our business comes from people who already own a home. When folks buy a new home, they typically spend the first 12 to 24 months upgrading floors, countertops, and fixtures. It’s only then that they decide to add living space outdoors.” Trex sells through 6,700 outlets in two main channels. The first: Home supply stores such as Lowe’s and Home Depot. They mostly cater the “do-it-yourself” crowd that’s mushroomed in the shutdown. The second is what’s known as the “pro channel,” the wholesale side encompassing both independent contractors that sell and install the decks, and building materials outlets such as ABC Supply and 84 Lumber. The “pro channels” specialize in the Trex’s premium products, while the home improvement side tilts to basic models that in these stay-at-home times, handy homeowners install as a favorite hobby.

Though it’s feasting as America’s homes sprout composite appendages at a rapid pace, Trex faces a major challenge on costs. “We’re seeing broad-based inflation in our inputs,” says Fairbanks. “It’s picking up faster than we expected.” The biggest increase is coming in transportation. Trex is buying far bigger volumes of plastic waste than ever before. Hence, its contractors need to make more stops, and cover more mileage to reach new suppliers. A shortage of drivers is rapidly raising their pay. To offset those surging expenses, Trex will increase prices an average of 5% starting on August 1. Still, a hike that size will still leave its composite offerings highly competitive versus wood.

But what happens when mills ramp production and the housing market cools, sending lumber prices downwards, and making wood decks more affordable? Fairbanks is convinced that composite will keep taking sales from wood at or near the recent rate, which is a lot higher than the big gains it was already notching pre-crisis. “America’s homes have a total have a total 40 to 50 million wood decks that will need to be replaced in the coming years,” he says. “We’ll gain more than our fair share of those sales. Even if the price differential goes back to where it was tomorrow, I’m confident that the conversion will continue.”

Fairbanks was betting on years of surging sales well before the virus spawned the work-from-home economy. Starting in 2019, Trex launched a $200 million expansion program at its plants in Virginia and Nevada that will expand its capacity by 70%. Those new production lines are powering up now––at just the right time. As of today, Trex’s inventories are depleted, and its factories can’t churn fast enough to supply the open air stages where families yearn to tread, lounge, play and cook. You’d think a mundane ersatz-wood extension would be as old economy as you could get. But new lifestyles create new sensations, and none other than decks made from plastic bags and wood chips are going platinum.

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