Trex Company, Inc.'s (NYSE:TREX) 26% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/ERatio

To the annoyance of some shareholders, Trex Company, Inc. (NYSE:TREX) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 17% share price drop.

In spite of the heavy fall in price, given around half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may still consider Trex Company as a stock to potentially avoid with its 25x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been pleasing for Trex Company as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Trex Company

Keen to find out how analysts think Trex Company's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Trex Company?

The only time you'd be truly comfortable seeing a P/E as high as Trex Company's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 85% last year. The latest three year period has also seen an excellent 43% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 4.0% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 10% per year, which is noticeably more attractive.

With this information, we find it concerning that Trex Company is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Trex Company's P/E

There's still some solid strength behind Trex Company's P/E, if not its share price lately. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Trex Company currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Trex Company you should know about.

If these risks are making you reconsider your opinion on Trex Company, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.