Analysts' Choice: No Ceiling On Roofer's Prospects

8/22/2016


  Recent Price
$53
  Dividend
$0.72
  Yield
1.4%
  P/E Ratio
15
  Shares (millions)
116
  Long-Term Debt As % Of Capital
35%
  52-Week Price Range
$58.69 - $38.95

Building-products supplier Owens Corning ($53; OC) has gotten off to a strong start this year, with earnings per share surging 92% on 7% higher sales for the six months ended June. The roofing unit (38% of first-half sales, 57% of operating profit) drove growth, with sales up 24% and operating profit more than doubling. The composites (34%, 32%) and insulation (28%, 11%) units didn't deliver much sales growth, but both grew operating profit at least 9%.

Shares have advanced 13% this year, nearly twice the pace of the S&P 1500 Index. Yet the stock trades at 15 times trailing earnings, near its lowest level since 2012 and 22% below its five-year median of 20.

The stock's low valuation reflects doubts over the sustainability of its operating momentum. Recent growth has benefited from acquisitions and unusually high reroofing demand, helped by severe storms in the Southwest. Re-roofing, about three-fourths of the unit's volume, could face long-term pressure as shingles with longer life spans become more prevalent.

But management's latest 2016 guidance implies a second-half outlook that seems overly conservative. The stock, with an Overall score of 99, is a Focus List Buy and a Long-Term Buy.

Reasons for optimism

The U.S. and Canadian residential-repair market generates 35% of total sales, followed by 22% for commercial and industrial and 17% for new residential construction. Owens Corning relies on customers outside of North America for its remaining revenue.

Some of the questions about Owens Corning center on its abnormally high profitability. In the June quarter, operating profit margin reached its highest level since the December 1988 quarter. So far, the company has not been forced to pass on to customers all of its savings from lower raw-materials costs. Higher volumes, especially in the roofing unit, have also improved profitability. Profit margins could expand further if Owens Corning succeeds in pushing through its August price hike.

Management's roofing guidance implies flat to lower shipments in the second half of the year, which seems conservative. Encouragingly, Owens Corning says September-quarter volumes got off to a good start on robust demand from new construction and roof replacement.

Cash from operations jumped 55% and free cash flow tripled in the 12 months ended June. Capital expenditures are projected to decrease 4% this year and will likely fall further in coming years, potentially freeing up more cash for dividends and stock buybacks. The company launched its dividend in 2014 and raised it 6% in each of the past two years.

Per-share earnings are projected to be flat for Owens Corning in the second half of 2016 and rise 8% in 2017. Median estimated growth for S&P 1500 building-products companies is 21% for the second half of the year and 18% for 2017. However, unlike most industry peers, analyst estimates for Owens Corning have risen sharply in the past 30 days, and the improving outlook may not be fully reflected in the share price.

An annual report for Owens Corning is available at 1 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
Jun '16
1.29
vs.
0.76
10%
52.52
-
45.46
18 - 16
Mar '16
0.53
vs.
0.19
2%
47.78
-
38.96
19 - 15
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
           
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
99
88
88
91
67
70
70

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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