Summary
Owens Corning is a BUY. The valuation is too inexpensive to ignore and still has good growth prospects. The management team is strong and has well defined goals with well thought out strategies to achieve those goals.
Understanding Owens Corning as a Business
Owens Corning is a building products business. They operate in 3 main segments: Composites, Insulation, and roofing.
The largest segment of their business is their insulation business which accounts for 37% of their revenue. Their insulation products are used in residential, commercial, and industrial construction to make structures more energy-efficient and comfortable. The insulation products include fiberglass insulation, foam insulation, and mineral wool insulation. A majority of the revenue for the insulation business is from residential buildings. The real estate market, particularly the new construction market, will have a large impact on how well this segment of the business is doing.
The next largest segment of the business is the roofing segment. This segment accounts for 36% of revenue. Owens Corning is one of the leading providers of roofing materials, including shingles and roofing accessories, for residential and commercial properties. They offer a range of roofing products designed to protect and enhance the appearance of buildings. The roofing business income is generated mostly from repairs of current roofs. This makes this segment less cyclical in nature and less affected by the housing market.
The third largest segment is the composites segment. This segment accounts for 27% of their revenue. Owens Corning is a leading producer of glass-fiber reinforcement materials used in composite systems to reinforce plastics primarily for transportation, electronics, consumer, and industrial markets worldwide. These materials are used in a wide range of applications, including automobiles, boats, wind energy, and various consumer products.
The building products space has a few competitors to OC however it is a difficult industry to break into. The largest players are always competing for market share. This is because its difficult to build a manufacturing infrastructure to compete in this industry. The advantage Owens Corning has in this space is top tier innovation in their products and skilled management. Owens Corning is maintaining profit margins in the high teens which is separating them from their competition.
Valuation Metrics
Using the Finviz stock screener we can look at the metrics that are important to us for assessing its valuation.
OC is values at nearly $13 billion. The current P/E is 10. OC has had good growth in th past 5 years growing at 31% yoy for those 5 years. The growth is expected to slow down over the next 5 years however still remain positive. OC has very little debt to equity at a ratio 0.6 Debt/EQ.
FAST Graphs Analysis
The FAST Graphs tool is great for analyzing a company’s earnings growth vs its share price. The black line represents the shar price and the orange line represents the earnings per share multiplied by 15.
Here we can see a long term chart of earnings growth where the share price hasn’t caught up with its earnings growth. This matches the fact that it is trading at a P/E of only 10 compared to its historical average of 15. This chart looks like the epitome of an undervalued stock that the share price is still catching up with its fundamentals.
Bull Thesis
Owens Corning has been performing well as a company for a long time. The share price has not caught up with the fundamentals yet. Historically Owens Corning has traded at a 15 P/E and they are only currently trading at a 10 P/E. The analysts are expecting the growth to slow down over the next few years however that doesn’t change the fact that the price hasn’t caught up with its current earnings.
Management is very skilled and will continue to keep profit margins high and that will help it break out of its cyclical nature. The management team has been talented in achieving corporate goals and is setting new goals to continue growth. Based on management track record its reasonable to think that they can keep achieving reasonable growth. Management’s current goal is to have 100% free cash flow conversion which means convert all of their income into free cash for the business. This is a very good sign for an investor because it means they are financially healthy and can use that cash to return value to the shareholder or to grow the business. The company has achieved 100% free cash flow conversion in the previous quarter and no reason to think they won’t be able to continue. This demonstrates the skill of the management.
Owens Corning has avenues to continue the growth its achieved before even if the analysts aren’t projecting it. Their products are important to the investment in improving infrastructure. Insulation reduces energy expenditure for buildings and their high performance composites are used in a wide range of renewable energy infrastructure. The government wants to spend money modernizing infrastructure and Owens Corning is positioned well to take advantage of that. They have a pedigree of developing advanced materials and can continue to do so.
Bear Thesis
The building products industry is cyclical and the growth in earnings was at the peak of the cycle. We are exiting that cycle now and earnings will retreat. The current valuation is based on its prospective growth and its projecting that growth will dry up so the valuation isn’t a high multiple. The slow growth and being out of cycle leads to stagnant or slow growing share price. This slow growth won’t help us achieve our goal of at least 15% return yoy.
The housing market looks to be on shaky footing with the increase in interest rates and that is bad for OC’s insulation business because it is dependent on residential construction. If the housing market crashes then it could take years for OC’s demand to come back. If that happens then our invested money won’t be working for us but instead sitting stagnant. It is important that if we invest our hard earned money we get a return greater than the market.
Buy Rating
We here at Basil Leaf Capital rate Owens Corning a BUY. Earnings have increased by a lot the past years and the share price is still trying to catch up to where the earnings are at. This is reflected by the low P/E of only 10. This valuation is too inexpensive to pass up on. The company is growing and the market is underrating them.
Owens Corning management is skilled in working toward its goals. One of the goals management has set out to do is achieve a 100% cash flow conversion on their profits. They have achieved this for 2 quarters in a row and look to continue to do this. This is important for returning shareholder value. Another goal of management is to achieve $10 billion in revenue per year by the end of 2024. This combined with the profit margins in the high teens lead to a profit of $1.7 Billion. At the historical P/E of 15 this means the company would be worth $25 billion dollars. This would be a doubling of the value of the company. Management has been skilled in delivering their goals and there is little reason to doubt they will be able to continue.
Owens Corning has been cyclical in the past however management is determined to break out of the cycle by keeping margins in the high teens. They will accomplish this by developing new high performance products and expanding the business into new markets. Even if there is a cyclical down trend for this company, at its current valuation it has a margin of safety to weather the storm and enough cash on hand to continue to pay the dividend.