Things have been going pretty well for Trex (NYSE:TREX), sending the shares up more than 50% over the last year and up over 90% over the last three years. Residential remodeling spending has been growing around 5% to 6% a year for several years. Trex continues to gain share within the decking space, and improved volumes have unlocked a meaningful amount of operating leverage.
I would expect 2017 to be another good year for remodeling spending, and it is possible that government policy changes (regarding taxes in particular) could lead to higher disposable income and/or consumer confidence sufficient to keep up the momentum beyond the next year. Even so, and even acknowledging the meaningful operating leverage potential still in the business, the valuation seems to already anticipate a lot of those improvements. You have to be comfortable with the idea that Trex can generate double-digit compound free cash flow growth across the next decade to find much value here, and that seems like a pretty bullish set of assumptions to me.
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Share Growth And Operating Leverage A Powerful Mix For Trex