03/29/2017

Owens Corning (NYSE:OC): An Attractive Investment Opportunity

Owens Corning (NYSE:OC): An Attractive Investment Opportunity

Below is a sample of one of the companies (Owens Corning NYSE:OC) that was in our latest Quarterly Focus List which highlights 5-7 buy ideas that we find compelling for the near term future. All of the companies released in this list have attractive valuations and a clearly identified short term catalyst for outperformance.

Overview: Owens Corning is a leading global producer of residential and commercial building materials, including glass fiber insulation, roofing shingles, glass-fiber reinforcements for products such as cars, boats, wind blades and smart phones; and engineered materials for composite systems. Founded in 1938, the company now operates in 26 countries with approximately 15,000 employees and generates annual revenues greater than $5 billion. OC emerged from bankruptcy in 2006 after filing for Chapter 11 in 2000 due to asbestos litigation. We like OC for the following reasons:

A Leader in All Three Operating Segments: OC runs well-managed businesses in markets that are growing modestly. 1) Roofing is a $10 billion market in the US and roofing components a $2 billion market. The company has a leading market position with less than 20% share. It operates a unique and strong distribution network, provides high quality differentiated products, as well as driving sustainable cost improvements through material science and vertical integration. 2) OC’s Insulation is benefiting from an improving housing market, and growing demand for energy-efficient products. Despite an uneven US housing recovery, the segment’s revenues have grown 8% CAGR since 2011 and its EBIT margin has improved from -8% to 8% in the same period. OC’s insulation business provides innovation, high quality, and great value, which allows its brand to enjoy 70% awareness among homeowners. 3) Composite Solution has been growing at the multiple of industrial production growth rates during the economic recovery, and returned to double EBIT margin and double Return on Capital after losing money in 2009. Top line growth is driven by demand, price increase, and mix improvement. YTD, segment revenue has grown 12% on a constant currency basis. Though currency is a headwind for nominal revenue growth, OC’s margin remains intact for Composite as the company manufactures in international regions.

Further Margin Expansion Potential: Poised to finish a strong 2015, management believes 2016 shares a lot of similarity with 2015 from the industry environment, growth potential and corporate execution’s perspectives. Management expects all three segments to deliver double digit EBIT margins in 2016, a milestone for the company. Specifically, stable pricing, promotion, and volume growth, as well as further asphalt deflation will further improve earnings in Roofing. Insulation will achieve full year double digit EBIT margin, driven by growth in new residential construction and improving pricing. Composites is entering a phase of tighter capacity utilization as demand grows at 1.6 times of the industrial production, which will be a key driver for margin improvement.

Strong Free Cash Flow Conversion and Growth Profile: The company expects 2015 earnings to free cash flow conversion rate of 100%, and the same conversion rate will continue to 2018. The strong FCF conversion rate is driven by low cash tax rate at 10-12% for the next two years, working capital progress, and expected CAPEX spend at just 100% of DD&A. Overall, improving housing and modest global growth will drive earnings and free cash flow growth for the foreseeable future.

About Value Expectations 18 Articles

ValueExpectations.com, by the founders of The Applied Finance Group is an investment blog that provides institutional quality equity research using AFG’s proprietary Economic Margin framework.

About Value Expectations 18 Articles

ValueExpectations.com, by the founders of The Applied Finance Group is an investment blog that provides institutional quality equity research using AFG’s proprietary Economic Margin framework.