Analysts' Choice: Owens Corning Beats Expectations

3/21/2016


  Recent Price
$46
  Dividend
$0.72
  Yield
1.6%
  P/E Ratio
18
  Shares (millions)
117
  Long-Term Debt As % Of Capital
31%
  52-Week Price Range
$48.50 - $37.29

Investing is an expectations game; own stocks that consistently exceed Wall Street's expectations, and you'll probably outperform. Owens Corning ($46; OC) has been beating expectations, and not just by a little. Indeed, in each of the last four quarters, per-share profits topped the analyst consensus by at least 40%.

Rare is the company that beats the estimate by 40% for a single quarter (10% of S&P 1500 Index stocks accomplished the feat in their latest quarter); rarer still is one that does so for four consecutive quarters (fewer than 1% of stocks). Owens Corning has responded to the profit surprises with a 12-month gain of 18%, versus a 3% decline in the S&P 1500 Index. The stock's valuation remains reasonable — a Quadrix Value score of 80. The stock is a Focus Buy and Long-Term Buy.

Gimme shelter 

Owens Corning offers an attractive play on the housing market. Its composites unit manufactures glass reinforcements used in such industries as construction, automotive, and telecommunications. Its insulation business sells into residential, commercial, and industrial markets, while its roofing unit makes shingles and roofing accessories.

All three segments produced significant profit gains in 2015, resulting in the best year of earnings growth in the company's history. Full-year profits per share jumped 46%, with a 40% gain in the December quarter. The insulation business has posted 18 consecutive quarters of higher earnings. The composite business delivered a 56% increase in earnings for the year, though fourth-quarter results fell 17%, as currency headwinds trimmed revenue. Still, volumes rose 5% in the fourth quarter. Roofing revenue rose 8% in the quarter, with earnings up 65%.

Owens Corning expects earnings growth to continue in all three segments in 2016. Steady housing demand should aid the bottom line; fueled by rising employment and low interest rates, housing starts are expected to exceed 1.2 million this year. The firm should also benefit from lower input costs. Low oil prices have lowered the manufacturing cost of asphalt shingles. The operating leverage conferred by price trends helped boost free cash flow to more than $340 million last year, up from $50 million in 2014.

Two recent deals should boost revenue. In January, the firm agreed to acquire the non-wovens and fabrics business of Ahlstrom, expanding its overseas business and adding roughly $85 million in annual sales. Last month, Owens Corning announced plans to acquire InterWrap, a leading manufacturer of synthetic roofing materials with 2015 sales of $250 million.

Conclusion

Owens Corning trades at 18 times the consensus 2016 earnings estimate of $2.97 per share, a 20% discount to the five-year average. And given the company's propensity to beat expectations, that consensus estimate could prove conservative. In February, the firm bumped the dividend 6% to an annual rate of $0.72, payable April 4.

You can obtain an annual report for Owens Corning at One Owens Corning Parkway, Toledo, OH 43659, (419) 248-8000, www.owenscorning.com.

OWENS CORNING
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '15
0.66
vs.
0.47
3%
48.50
-
41.59
20 - 17
Sep '15
0.96
vs.
0.62
5%
47.90
-
38.95
23 - 19
Jun '15
0.76
vs.
0.38
4%
45.70
-
37.29
28 - 22
Mar '15
0.19
vs.
0.29
-6%
43.67
-
34.73
25 - 20
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
5.35
2.57
0.68
48.50
-
34.73
19 - 14
2014
5.28
1.76
0.64
46.64
-
28.38
26 - 16
2013
5.30
1.86
0.00
45.55
-
34.41
24 - 18
2012
5.17
1.10
0.00
38.00
-
25.70
35 - 23
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
90
73
80
77
54
48
68

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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