by Debra Fiakas CFA
It appears to be the ‘summer of the small-cap’ as performance in the
sector outpaces other sectors on the first day of summer 2016.
In keeping with the adage “make hay while the sun shines”, we
shifted into a higher gear to find promising small companies that
might participate in the small-cap renaissance. Trex Company (TREX: Nasdaq)
bubbled to the top of a couple different screens based on growth and
return. There is much to like in a company delivering strong
growth. A bargain price is just icing on the cake. With
a ratio of 0.77 in price/earnings to growth, Trex is well frosted.
The company designs and manufactures outdoor decking, storage,
fencing, stairs and railings, using wood waste and resin
composites. Outdoor lighting is a recent addition to the
product line. Its products are designed to be as aesthetically
appealing and longer lasting than natural wood. The company
delivered $54 million in net income or $1.73 per share from $451.7
million in total sales in the most recently reported twelve
months. An impressive $59.2 million of sales were converted to
operating cash flow.
The gaggle of analysts who follow Trex closely seem to think there
is more of the same ahead. The consensus estimate for the full
year 2016 is $2.16 in earnings per share on $471.8 million in total
sales. Indeed, the group has been busy raising estimates in
the last three months, with most of the incremental change weighted
to the back end of the year. If achieve the 2016 hurdle
represents 24% year-over-year growth in earnings. The 2017
consensus estimate of $2.46 in earnings per share suggests a slowing
to about 13% annual growth. Yet in an economy struggling to
eke out low single digit expansion a double digit growth rate stands
With all this good news it is surprising to find the stock trading
at 24.5 times trailing earnings and 17.2 times the consensus
estimate. Investors may be tempting their valuation of the
stock because of the highly leveraged balance sheet. Trex is
weighted down with $141.5 million in debt, representing a
debt-to-equity ratio of 161.6%. The current ratio is 1.00,
which may seem inadequate even if it has satisfied creditors.
It is also noteworthy that a long position in TREX presents some
risk. The beta measure of 2.40 suggests a volatility that
might worry conservative investors. There is no dividend that
might otherwise provide a stipend during a period of price
weakness. Despite the blemishes TREX is a ‘sweet peach’ for
the summer of small-caps.
Debra Fiakas is the Managing
Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
Neither the author of the Small Cap
Strategist web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.
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