Trex's mysteriously high margin: a business analysis problem for you...

Apple is a definitively high margin manufacturer. Everything about that company screams high margin.

The stuff feels expensive and (frankly) is expensive. But you are willing to pay for it because (a) it defines your identity and how you feel about yourself, (b) really does work pretty well and (c) has very good ways of keeping competition out – so you can’t buy a true substitute.

On top of that Apple has software sales which (typically) are fatter margin than manufacturing.

Let’s spell out just how high margin.

Here is Apple’s 2017 second quarter results (link). Note these results are unaudited and in millions of dollars.

Reported sales were $52,896 million, Gross Profit was $20,591 million, and Operating Income was $14,097 million.

These are stunning numbers (especially because of their size) but lets spell them out as percentages…

Gross margin was 38.9 percent.
Operating margin was 26.7 percent.

Just stunning numbers.

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At Bronte we have the (justified) view that any manufacturing company with margins fatter than that needs some explaining.

So let me present you Trex Company.

Trex makes decking. Plastic decking. Outside many houses in middle America is timber deck often with a barbecue – or at least a grill – sitting at the end. This is a place for barbecue, socialising and – of course – beer.

The beer is very important.

The deck is also a frustration for owners because exposed to the weather the deck needs to be maintained regularly – and at a minimum oiled every year or so.

Sure the frustration can be offset by more beer. And I guess that makes it okay.

But these days you have an alternative – you can have fake timber decking. The fake timber is made of plastic and the sales pitch is that it looks just like timber but all you need to do for maintenance is sweep it.

Plastic decking is sold as a superior alternative to timber.

There are lots of suppliers. There is Trex Company, Fiberon, Azek and others. Beyond that Home Depot and Lowes have their own house brands (eg ChoiceDek available only at Lowes).

So with plenty of competition for a building product where most people will not know the brand names (and where the purchase is large and so you might wish to shop it) you would expect lowish margins.

But you would be wrong. The margins are stunning.

Here is the last quarterly result (link). This time the numbers are in thousands of dollars rather than millions…

Reported sales were $144,806 thousand, Gross Profit was $65,169 thousand, and Operating Income was $41,900 thousand.

Again we should spell them out as percentages…

Gross margin was 45.0 percent.
Operating margin was 28.9 percent.

Whoa – Trex Company – with lots of competition – is fatter margin than Apple.

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So what is happening here? How the hell does Trex do it?

There is your business puzzle for today.

And if you are a journalist with a middle-America beat there is a great story here for you. This one is just made for the USA Today or non-business mainstream media.

John

Disclosure: short a little Trex (which traded badly on these results).

This is not a death-grip short like say Home Capital Group. But it is a source of some amusement. I like puzzles like this.