Analysts' Choice: Expect Storm Surge For Owens Corning

10/16/2017


  Recent Price
$80
  Dividend
$0.80
  Yield
1.0%
  P/E Ratio
21
  Shares (millions)
113
  Long-Term Debt As % Of Capital
40%
  52-Week Price Range
$79.68 - $46.45

While every natural disaster is unique, hitting different regions in different ways, they typically share one characteristic: Afterwards, homeowners need to repair or rebuild.

In the wake of two major hurricanes pounding the U.S. mainland in the last few weeks — Harvey hitting Texas and Irma hitting Florida — recovery efforts continue. Owens Corning ($80; OC) hasn't said much about the hurricanes, but both history and logic suggest that the push to fix or replace homes will spark extra demand for the company's three core products: insulation, roofing materials, and composites used for reinforcement in different types of construction.

Owens Corning, which has exceeded the consensus profit estimate by an average of 20% in the last four quarters, is expected to report per-share-earnings growth of 16% for the September quarter, 39% for the December quarter, and 15% for 2018. The stock is a Focus List Buy and a Long-Term Buy.

Looking ahead

The bulk of the storm-driven business should arrive not in the December quarter but in 2018. However, the timing of any incremental sales next year is difficult to predict. Some regions bounce back faster than others, with lower-income neighborhoods — such as several flooded by the Harvey storm surge — often needing more time to recover. After Hurricane Katrina in 2005, about 45% of repair permits were filed in the first half of 2006, with another 40% spread out over the next four quarters.

Of course, we're not the only ones who understand the post-disaster demand phenomenon for building products. Since Harvey made landfall on Aug. 25, shares of Owens Corning have gained 15%, while per-share-profit targets for the December quarter have risen 1% and the 2018 consensus has increased 3%.

But even after the run-up, Owens Corning shares seem attractively valued. The shares trade at 21 times trailing earnings, 11% below the building-products industry median and roughly in line with their own five-year average.

Owens Corning raised insulation prices in September; we'll probably get some clarity on the success of that price hike when the company releases September-quarter results on Oct. 25. Some analysts expect hurricane demand to further boost pricing power, which could help Owens return to its trend of improving profitability, a streak that stalled in the June quarter after eight consecutive quarters of higher operating margins.

Not just a storm story

While the hurricanes add an exclamation point to the Owens Corning story, we liked what we saw even before the first storm formed. According to Goldman Sachs, housing starts remain more than 10% below typical midcycle levels, suggesting the midpoint of the new-construction cycle may still be up to three years away. The combination of unusually low home inventories and millennials entering the housing market should support continued demand for new construction — good news for Owens Corning.

Obtain an annual report for Owens Corning 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 '17
1.20
vs.
1.30
3%
67.74
-
59.26
17 - 15
Mar '17
0.85
vs.
0.53
20%
62.79
-
50.77
17 - 14
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
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
5.68
3.63
0.74
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
1.71
0.00
45.55
-
34.41
27 - 20
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
66
72
84
63
96
88

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


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