In a recent report, analysts at SunTrust downgraded Trex Company Inc TREX 3.46% from Buy to Hold based primarily on the stock’s valuation at current price levels. Trex is a global leader in recycled wood-alternative decking, railings and other outdoor items.
Back in February Stifel downgraded the stock from Buy to Hold, citing a “stretched” valuation. The stock has traded higher since that move.
Sold Estimates, But Premium Price
Analysts believe that the next couple of years will be “very good” for Trex, but they also feel that the major opportunities for revenue growth in the plastics business may not come in the near future.
Without a short-term catalyst for revenue growth upside, analysts “cannot meaningfully increase” earnings estimates at this time.
After considering current financial projections for Trex, analysts can no longer justify a Buy rating on the stock when it is currently trading at an estimated 2016 EV/EBITDA multiple of 14X, more than 40 percent higher than its peer group average.
Premium Valuation Deserved
Analysts clarify that the 40 percent premium valuation for Trex is well-deserved, as they consider the stock to be “the best in our group.” However, they cannot see much upside to current valuation levels.
Outlook
SunTrust is projecting 2015 earnings of $457 million and 2016 earnings of $513 million for Trex. These numbers represent 17 percent and 12 percent year-over-year revenue growth, respectively.
Following a “great” 2014, analysts believe that Trex will continue to gain market share and enjoy growing demand for decking projects over the next couple of years.
Target Price
In addition to the downgrade, SunTrust lowered its target price for Trex from $64 to $55. Analysts note that increases in share gain rate and/or unanticipated strength in the decking market could lead to future upward revisions of the new target.
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