Owens Corning: Latest Weak point And Pricing Necessitate A Downgrade (NYSE:OC)

Over my time as an investor, I’ve been closely influenced by people like Warren Buffett, Philip Fisher, Benjamin Graham, Peter Lynch, and others. And one of many issues that I’ve realized from them is that, generally, the most effective funding prospects are essentially the most ‘boring’ alternatives that exist. And whereas the definition of ‘boring’ is likely to be subjective, few would argue that an organization that engages within the building and sale of fiberglass supplies, insulation, and different merchandise, could be thought of ‘boring’ by many. That enterprise in query is Owens Corning (NYSE:OC). And since I rated the company a ‘robust purchase’ again in July of 2022, shares have generated upside of 59.9% at a time when the S&P 500 has returned a extra modest 13.9%.

The market tends to look previous how low cost ‘boring’ firms may be. And it’s in that cheapness that we get the possibility to select up some true bargains. However after seeing its share value rise so considerably because the publication of that article, a good query could be whether or not the inventory nonetheless has additional upside from right here or not. I’d argue that, primarily based on latest monetary efficiency that has proven some weakening throughout the board, and since the enterprise is now not fairly the cut price that it was beforehand, it doubtless does deserve a downgrade. Besides, that positions the corporate as a strong ‘purchase’ candidate at the moment.

Time for a downgrade

On the time that I rated Owens Corning a ‘robust purchase’, the corporate was doing properly to develop each its high and backside strains. This, mixed with how low cost the inventory was, led me to essentially the most bullish score that I can assign to an organization. Quick ahead to in the present day, and we’re beginning to see some weaknesses emerge. Take into account, as an example, how the enterprise carried out in the course of the first nine months of its 2023 fiscal 12 months. Income for that point got here in at $7.37 billion. That represents a 13.8% drop in comparison with the $7.48 billion the corporate generated one 12 months earlier.

Administration attributed this decline to decrease gross sales volumes in each the Insulation and Composites cyclists the agency. Nonetheless, these had been offset to some extent by larger pricing that the corporate charged its clients throughout this inflationary cycle. Apparently, while you dig a bit deeper, you see that not all the firm’s operations had been the identical. The Insulation section, as an example, reported a roughly 1% year-over-year decline in income. The massive drop, then, got here from the Composites section. Gross sales plummeted 14.4% from $2.07 billion to $1.77 billion. For the primary 9 months of the 2023 fiscal 12 months, the section suffered from a 13% hit related to decrease volumes. You’ll suppose that the decline in quantity would have been bigger provided that the corporate acknowledged very clearly that pricing helped to offset the declines to an extent. Nonetheless, the corporate did undergo from international foreign money fluctuations, the affect of sure asset gross sales and asset purchases, and different elements.

With the drop in income got here a decline in income. Internet revenue fell from $1.12 billion to $1.07 billion. Working money circulate additionally took a beating, dropping from $1.09 billion to $1.02 billion. If we modify for adjustments in working capital, we additionally get a drop, this time from $1.42 billion to $1.41 billion. Even EBITDA pulled again, declining from $1.81 billion to simply beneath $1.80 billion. Relating to the latest quarter, we’ve began to see some enchancment. Though income is down 12 months over 12 months as may be seen within the chart above, and internet income have adopted swimsuit, the corporate’s different profitability metrics have proven enchancment 12 months over 12 months.

Clearly what we’ve here’s a firm experiencing a little bit of weak point. However it’s encouraging to see some enchancment on the underside line in the latest quarter. Once we dig even deeper although, we discover out that the image is much more bullish for the latest quarter. And that’s as a result of, within the third quarter of final 12 months, the corporate booked a $130 million achieve on its fairness technique investments. That’s the reason there’s a disparity between earnings and money flows. Along with that, nonetheless, the corporate was in a position to preserve different prices in line. Advertising and marketing and administrative prices elevated modestly relative to income. Nonetheless, the enterprise reported a rise in its gross revenue margin from 27.4% to 29.3%.

Whereas this may increasingly not appear giant, that disparity, when utilized to the income generated within the third quarter alone, translated to a further $47.1 million in pretax income for the enterprise. And in keeping with administration, this enchancment was attributable to the advantage of larger gross sales costs, in addition to decrease prices resembling decrease supply bills and decrease enter prices. What this exhibits is that, at the same time as inflationary pressures have eased up on the corporate from a provide aspect, it has been in a position to seize extra revenue by not decreasing its costs in tandem with the lower in prices it skilled.

Sadly, we do not know what to anticipate on the subject of the remainder of the fiscal 12 months. But when we merely annualize monetary figures, we’d anticipate internet income of $1.18 billion, adjusted working money circulate of $1.76 billion, and EBITDA of $2.23 billion. This could suggest solely a marginal worsening in comparison with what the corporate noticed in 2022. As you possibly can see within the chart above, utilizing two of the three metrics for valuing the corporate, the rounded pricing of the enterprise from a a number of perspective is similar from 2022 to 2023. And even the one which’s not, the price-to-earnings a number of, just isn’t materially completely different.

Within the subsequent chart above, I made a decision to indicate how shares had been priced once I final wrote concerning the enterprise. At the moment, the ahead figures would have been for the 2022 fiscal 12 months. As you possibly can see, whereas shares of Owens Corning stay extremely low cost on an absolute foundation, they’re fairly a bit costlier than once I wrote concerning the firm final July. Now, within the desk beneath, I made a decision to check the corporate to 5 comparable corporations. And what I discovered right here is that, utilizing every valuation method, it ended up being the most affordable of the group.

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Takeaway

Right now, I nonetheless stay a significant fan of Owens Corning. The corporate seems to be extremely low cost on an absolute foundation and it’s positively engaging in comparison with comparable enterprises. It is nowhere close to as low cost because it was beforehand. However even with that change, it was tempting for me to maintain the corporate rated a ‘robust purchase’. The one purpose why I’ve determined to downgrade it to a strong ‘purchase’ is as a result of, whereas the inventory is reasonable, it has skilled some weak point this 12 months on the underside line. Ideally, I’d wish to see progress on this entrance as an alternative. It would not take a lot for me to improve the inventory once more. If the fourth quarter, as an example, is available in very similar to the third quarter did, and if shares are nonetheless priced round the place they’re in the present day, I doubtless will improve the inventory as soon as extra. However for now, a ‘purchase’ appears to take advantage of sense to me.