Analysts' Choice: Owens Finds Profits In Pink

3/13/2017


  Recent Price
$60
  Dividend
$0.80
  Yield
1.3%
  P/E Ratio
17
  Shares (millions)
114
  Long-Term Debt As % Of Capital
35%
  52-Week Price Range
$60.99 - $44.06

As Owens Corning ($60; OC) found in the 1950s, even the most mundane products can be differentiated by a simple change in color. While designing a new type of home insulation, Owens added red dye to give the fiberglass wool a pink hue that contrasted sharply to the dull yellow insulation sold by its rivals. By the 1980s, it only seemed natural for Owens to enlist the Pink Panther cartoon character in commercials.

For investors, Owens has distinguished itself from peers by offering superior growth, share-price action, and valuation. Over the past 12 months, Owens grew per-share profits 31% (S&P 1500 median for the building-products industry is 26%), sales 6% (9%), cash from operations 27% (5%), and free cash flow 86% (13%). The stock has returned 16% in 2017, well ahead of its industry median of 6%. Yet the stock continues to look cheaper than peers based on trailing P/E (17 versus 22). Owens is a Focus List Buy and a Long-Term Buy.

Constructive on construction

Owens operates three business, all connected to the home-construction market. Housing starts remain well below levels historically seen in the middle stages of an economic upswing. With sentiment still restrained, the building-products industry could see a long runway for growth ahead.

Although insulation is now Owens' smallest unit (30% of 2016 revenue, 14% of operating profit), it will play a big role in the company's growth prospects this year. The unit's revenue fell 6% in 2016, partly due to soft pricing and a commercial dispute with a major insulation installer. Encouragingly, prices stabilized in second half of the year, and Owens also recovered some of its share in the U.S. residential market. The current environment is supporting higher prices, and management expects the unit's operating profits to jump 27% this year.

Roofing (37%, 55%), Owens' most profitable business, drove growth last year, with sales up 24% and operating profit up 55%. The unit benefited from the $452 million acquisition of InterWrap in April and a spike in residential repairs due to unusually heavy storm damage. Owens says the business could contract this year, as growth from new construction and reroofing may not offset expected declines in storm-related demand.

The composites unit (33% of 2016 revenue, 30% of operating profit) makes glass-fiber materials found in products as dissimilar as roofing shingles, telecommunication cables, and boats. Unlike Owens' other units, composites demand is driven by general global economic activity and the replacement of traditional materials, such as aluminum, wood, and steel. Owens sees the segment's operating profits climbing 9% in 2017, compared to 14% growth last year.

Analyst estimates for Owens have risen in the past month, with the consensus anticipating 6% higher per-share profits in 2017 on 2% revenue growth. Owens has topped the profit consensus in 10 straight quarters. If the company meets the consensus 2017 profit estimate and its trailing P/E rises to 18, its shares will rally 16% over the next 11 months.

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
Dec '16
0.72
vs.
0.66
7%
56.13
-
46.45
16 - 13
Sep '16
1.08
vs.
0.96
5%
58.69
-
50.33
17 - 15
Jun '16
1.30
vs.
0.76
10%
52.52
-
45.46
18 - 16
Mar '16
0.53
vs.
0.19
2%
47.78
-
38.96
19 - 15
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
5.68
3.63
0.71
58.69
-
38.96
16 - 11
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
1.58
0.00
45.55
-
34.41
19 - 15
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
93
56
88
77
66
83
69

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


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