- The Washington Times - Monday, October 17, 2005

New management at Trex Co. is banking on sales of new products to stop a precipitous plunge in the company’s stock price.

The Winchester, Va., company makes outdoor deck and railing materials from recycled waste wood and plastic. It sells directly to about 90 regional building materials distributors, including the Home Depot and Boise Cascade.

The company’s former chief executive officer, Robert G. Matheny, retired in August, citing health reasons. He was replaced by Anthony J. Cavanna, Trex’s former chief financial officer. Trex also promoted Andrew U. Ferrari to chief operating officer from vice president of marketing and business development.

Although Trex dominates the market for composite decking, its profits have been hurt by rising costs for raw materials. The price of polyethylene has risen about 50 percent over the past year.

Earnings also were reduced by the expense of opening a manufacturing plant in Olive Branch, Miss., in May and introducing new decking products in the past year. Trex also is trying to eliminate excess inventory.

The company’s new management plans to capitalize on the products that it has already introduced rather than incur more expenses by continuing to expand its product line next year.

“We are looking for different applications for composite lumber,” Mr. Cavanna said.

There is room to grow. Composite materials represent only about 20 percent of the decking and railing market in an industry dominated by wood products. Mr. Cavanna said the low maintenance and long life of composites give the company a “better mousetrap” that should allow Trex to grow within its industry.

“You don’t have to sand it, you don’t have to stain it, you don’t have to make it water repellent each year,” Mr. Cavanna said.

So far, Trex controls about 40 percent of the composite decking and railing market. Louisiana Pacific is its biggest competitor.

Trex lost $1 million (7 cents per diluted share) in the second quarter ended June 30 on revenue of $82.9 million, compared with profits of $11.1 million (75 cents) on revenue of $83.4 million a year ago.

Trex is expected to report third-quarter earnings next week.

Over the past year, Trex’s stock (NYSE: TWP) has plunged from a high of $54.25 per share Dec. 27 to a low of $21.61 Oct. 14. It fell 7 cents yesterday to close at $21.93 per share on the New York Stock Exchange.

Trex’s nose dive began in earnest on June 22, when the company predicted a loss for its second quarter and warned that “a combination of factors, both on the revenue and the income side, are making this year much more challenging than we had anticipated.”

“That’s when the stock really cratered,” said Scott Nelson, a research analyst for Stephens Inc., a Little Rock, Ark.-based financial services firm. “Ever since, it’s been under pressure.”

Shareholders filed suit within weeks, accusing Trex of withholding financial information. That lawsuit still is pending.

Nevertheless, stock analysts remain upbeat about the outlook for Trex.

“Trex’s first-mover advantages in terms of manufacturing, distribution and branding have enabled it to successfully capitalize on the high growth market for wood-plastic composite decking and railing products,” said Mr. Nelson, whose firm has no financial dealings with Trex.

Joel Havard, an analyst for Richmond financial firm Scott & Stringfellow, predicted sales growth of 20 percent for Trex as consumer acceptance of composite decking grows.

“The ultimate market penetration of synthetic deck materials may well fall short of 100 percent, but we believe there’s still plenty of share yet to gain,” said Mr. Havard, whose firm has an investment banking relationship with Trex.


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