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From the Survey: Owens Corning
Owens Corning (OC) operates in two major segments, Building Materials and Composites. The Building Materials division produces insulating systems, asphalt roofing shingles, and stone veneer products for residential, commercial, and industrial customers. The composites segment manufactures reinforcement materials for use in various products. Both of these divisions have been hit hard by the lingering downturn in construction, which resulted from the housing crisis and the recent U.S. recession. Owens’ management is navigating these turbulent times by investing in other geographic regions that should provide an additional revenue stream. This ought to allow it to continue reporting respectable earnings despite the precipitous decline in current demand from the U.S. market.
Over the past year, the company has been able to increase earnings largely because of better operating efficiency; operating margins are expected to increase by about one percent this year. Revenues have also risen, year over year, since the Asian market segment has begun to significantly add to Owens’ top line. Management has stated that it intends to expand further in Asia and is opening a composite plant later this year. This action should allow Owens to gain market share in this part of the world.
The U.S. housing market is expected to remain weak for quite some time. Research suggests that a significant amount of housing inventory is still in the system, and the estimates of excess inventory range from about ten months on upwards, which would dampen construction activity for some time. We suspect there may be about four million homes waiting to be foreclosed on, and these houses will hit the market over the next couple of years. This will not only slow construction activity, but strain housing prices and put possible deflationary pressures on the overall economy. This, in turn, may affect Owens’ U.S. -based operations, and we do not anticipate much recovery in any segment that relies on the housing industry. Owens’ management recognizes this possibility and thus, is focusing on moving into other regions. Additionally, the company has been streamlining its operations in order to lower costs and remain competitive.
The stock is priced at about 16 times estimated earnings of $1.70 a share this year. However, we are forecasting that the company will earn $2.20 a share in 2011, which would put the forward P/E at around 12.5, below the historical average of 15.0. This presents a possible buying opportunity. However, investors should note that the company has seen a significant deterioration in the roofing business and we expect this to continue because of the high levels of housing inventory that have yet to be pushed onto the market place due to slower foreclosure proceedings. Even so, we believe that strong growth in Asia will allow earnings to recover. Therefore, the current stock price may present a decent entry point.
The company is supposed to report earnings for the third quarter at the end of October. This should give us further insight in regard to construction demand after the home buyers tax credit expired. Investors should wait until after this report since a big miss would likely indicate a much weaker market than we anticipate, and may change our outlook on this company going forward. Currently, we are expecting earnings of $0.40 a share for the quarter, much lower than our prior estimate of $0.70 a share due to further weakness in the construction industry. This may spell difficult times for Owens, at least until its Asian segment begins to be a major part of its operations, which likely won’t happen until late 2011.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.