In Housing, This Deck Looks Stacked in Investors' Favor
Just a couple of weeks ago, Trex's third-quarter earnings were looking dubious in the wake of a disappointing Q2. And while those earnings proved relatively in line with what management told us to expect -- a paltry 2% increase in sales -- the stock price has nonetheless risen more than 27% as of this writing. Given lingering fears that the housing recovery could stall, and with unemployment numbers still above 7%, there's plenty of reason to wonder why Mr. Market is so bullish. But as it turns out, the response to Trex numbers isn't about what happened -- but what's going to happen.
Real growth in fake wood coming
When Trex announced on Oct. 4 that it was expanding its distribution in the northeast significantly, the market essentially sighed. But when management added color to this information on the earnings call on the 25th, the share price rocketed up.
In the earnings call, CEO Ron Kaplan said:
Based on the recent market share wins, we expect this element of our strategy to grow sales in 2014 by $40 million to $60 million. As with all major changes of this kind, a maximum benefit usually takes two to three years to be fully realized. Therefore, we expect market expansion from these recent initiatives to continue over the next three years.
So management is guiding for $40 million-$60 million in sales growth in 2014. Based on a TTM run rate of about $330 million in sales at the end of this year, that's worth 12%-18% in growth next year.
The news gets even better. Toward the end of the Q&A at the end of the call, CFO Jim Cline was asked whether that $40 million-$60 million was a "minimum expectation" for growth.
"Yes, that's fair," Cline said -- a pretty strong commitment from both him and his boss, Kaplan.
Real growth in wood and homes
Trex wasn't the only housing-related stock posting buoyant news. Lumber Liquidators also made investors happy this week, announcing strong sales growth of 17% and net income growth of 58%, while raising guidance for the remainder of the year.
Lumber Liquidators , it seems, has benefited more strongly over the past year from the housing recovery, as new homeowners and investors are likely spending on inside updates first.
Meritage Homes is also continuing to post strong results, with revenue up 44% and net earnings up an astounding 463% in the recent quarter. The company is selling more houses, at higher prices, year over year.
From the earnings announcement:
"The recovery in the housing market that began last year drove strong sales growth and price appreciation through the middle of this year, until buyers reacted to successive price increases and higher interest rates by pausing their purchasing decisions, thereby moderating the demand for new homes," explained (CEO) Steve Hilton. "In some ways, the slower pace of sales seen in the third quarter is healthy for the market, allowing subcontractors and suppliers to catch up before the next spring selling season, and taking some upward pressure off costs."
Two key points here: First, higher interest rates did cause a momentary "pause" in the market, which was expected. Despite this, Meritage Homes performed exceptionally well.
Second, demand for next year will remain strong, as is evidenced by Hilton's remarks about the 2014 spring selling season. And while new housing rarely features composite decking, seeing homebuilders continue to do well is a strong indicator of how the overall housing market -- which is central to both Trex and Lumber Liquidators perform -- is holding up.
Kaplan and his team earned the right to show us they could grow the company. And while the results are yet to come, their tone on the earnings call was clear: Management is convinced the growth is coming.
I've previously stated that it's best to invest in companies that you know are growing, like Lumber Liquidators and Meritage Homes. After this earnings call, I'd say Trex is now squarely in that category.
What do you think? Tell us in the comments below.
Looking for more long-term ways to grow wealthy?
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love.
The article In Housing, This Deck Looks Stacked in Investors' Favor originally appeared on Fool.com.Jason Hall owns shares of Lumber Liquidators, Trex, and Meritage Homes. The Motley Fool recommends Lumber Liquidators, Meritage Homes, and Trex. The Motley Fool owns shares of Lumber Liquidators and Trex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.