Owens Corning Is A Double-Edged Sword

Construction spending continues to run hot on everything from housing to commercial buildings.

As the world leader in building materials and composite solutions, Owens Corning (OC) benefits from the strong demand.

Yet, heavy inflation drags down their margins.

That’s probably why it ranked last amongst financial pros’ building products and equipment stock searches this month according to our proprietary data.

However, we feel there might be a near-term catalyst once we make it past the holidays.

And that could send shares soaring.

Owens Corning’s Business

Know all that Pink Panther insulation in your attic?

You can thank Owens Corning for that.

Started back in 1938, the company operates three segments:

• Composites (27.8% of revenues) – Production of glass fiber reinforcement materials and vertically integrated downstream activities. General global economic activity drives composite demand as well as higher replacement of traditional materials such as aluminum, wood, and steel with composites that offer lighter weight, improved strength, lack of conductivity, and corrosion resistance.
• Insulation (37% of revenues) – Thermal and acoustical batts, loose-fill insulation, foam sheathing and accessories, glass fiber pipe insulation, energy-efficient flexible duct media, bonded and granulated mineral wool insulation, cellular glass insulation as well as foam insulation. Homebuilding and remodeling as well as building construction drive demand for insulation products as well as energy efficiency regulations.
• Roofing (38.2% of revenues) – Laminate and strip asphalt roofing shingles, roofing components, synthetic packaging materials, and oxidized asphalt. Demand is driven by general home and building construction, remodels, as well as storm damages.

Note: Corporate eliminations were 2.9% of net sales.

Currently, the company is focusing on its key markets, including North America, Europe, and India, as well as creating a more cost effective network through improved supply chains and manufacturing processes.

Owens added to their top line through acquisitions of vliepa GmbH and Paroc. At the same time, they shed assets such as their insulation site in Santa Clara, California.

Financials

After fairly robust growth through 2018 of close to 10%, sales began to slip. It wasn’t until the most recent year that the company saw double digit revenue expansion.

To offset most of the inflationary pressures, Corning increased prices and plans to keep at it to ensure a positive price/cost mix.

That’s allowed them to push gross margins to nearly 28% in the most recent quarter with operating margin just shy of 18.5%.

As part of its growth strategy, the company maintains low levels of debt, with long-term obligations at $2.89 billion with nearly $1 billion cash on hand. 

With free cash flow of nearly $1.2 billion, that frees management to make acquisitions to expand the business as well as invest in their supply chain.

Valuation

Current value metrics for Owens Corning paint a stock priced at a discount.

With shares trading at just 10x earnings and 6x-7x cash flow, Owens Corning offers better value than the vast majority of stocks in the industrial sector.

In fact, shares trade better than their 5-year average with the exception of price to sales, price to book, as well as dividend yield.

Our Opinion – 7/10

Inflationary headwinds should subside in Q1-Q2 of next year as supply chain issues clear. 

Yet, Owens will still have all its price increases in place. That should protect margins against what we see as heavy construction demand for the next several years.

That said, even as cheap as the company is now, we’d prefer a better margin of safety with the company and be more interested in shares closer to $80.