Shares of Owens Corning (NYSE:OC) have risen to fresh all-time highs. A rather stagnant stock and business in the 2010s has really come to life post-pandemic, as it simply has become a better business with a real focus on ESG, insulation and the energy transition.
Structural sales growth, margin expansion and solid capital allocation decisions have created a lot of value for investors over the past decade, even as skepticism has held back valuations. These remain non-demanding here, yet it has seen strong momentum already, which makes me a bit cautious here.
Owens Corning has a long and rich history, founded back in 1935 as a partnership between Owens-Illinois and Corning Glass Works. The business has been public since 1952 and has seen a rich and volatile corporate past.
With the passage of time, the company has grown to its current base, a business which runs over a hundred manufacturing sites across more than 30 countries, employing nearly 20,000 workers in the process.
For the year 2022, the company generated nearly $10 billion in sales, $9.8 billion to be more precise, having essentially doubled from the sales levels in the earlier 2010s.
The business generated sales from three end markets. This includes a $3.7 billion insulation segment, a similar-sized roofing business and a $2.7 billion composites business. Across divisions, it is the residential market which is responsible for about 60% of sales, complemented by commercial and industrial applications. About 70% of sales are generated in the US, complemented by activities in Europe, and the rest of the world.
It has been a focus on product innovation and greater R&D investments, simply better execution and prefab production, which has laid the foundation of the success over the past decade. Not only have sales risen substantially over this period of time, EBITDA margins have doubled as well to about 18% of sales. It was the combination of advancements in both sales and margins, which each doubled, as growth on a per-share basis accelerated with one in five shares being bought back over this period of time as well.
It is these achievements which made that a $30-$40 stock in the early 2010s, traded around the $50 mark by 2016. After a post-pandemic rally, shares broke the $100 mark in spring of 2023 after which shares have risen to current numbers close to the $150 mark.
Zooming Into The Performance – A Strong 2022, A Softer 2023
In February of last year, Owens Corning reported a 15% increase in 2022 sales to $9.8 billion on which the company posted operating profits of $1.7 billion, yet this number included a $130 million gain on an equity method investment. After-tax profits of $1.24 billion worked down to a diluted GAAP earnings number of $12.70 per share, with adjusted earnings reported at $12.88 per share.
Based on this earnings power, a $100 stock looked quite cheap at a high single digit earnings multiple as the company employed leverage less than reported EBITDA.
While the long term outlook is key as a result of greater focus on insulation, energy efficiency and better materials, it were higher interest rates which put pressure on construction activity of course. While the company did not provide a full year outlook, it guided for sales declines in the first quarter of 2023, to be accompanied by margin declines.
In April, the company posted a 1% fall in first quarter sales, with adjusted earnings down 5% to $2.77 per share, as the company guided for continued sales declines in the second quarter. Second quarter sales fell another 1% and while earnings were flattish, adjusted earnings rose by 8% to $3.78 per share, with the higher growth being the result of continued share buybacks. Needless to say, sales declines of a percent and minimal earnings growth was better than the picture provided at the outset of the year.
In October, third quarter sales fell by 2%, yet margins improved by mid-single digits, as this and margin expansion drove a 15% increase in adjusted earnings to $4.15 per share.
This means that year to date, sales are down a percent, after the first nine months of the year. Adjusted EBIT and EBITDA were down a percent as well, yet positive growth numbers were seen in the third quarter, with buybacks allowing for a 7% increase in earnings per share. Earnings top $11 per share, putting the business firmly on track to post earnings in excess of $14 per share.
Despite shares having witnessed a spectacular rise during 2023, to the tune of 50%, earnings multiples are non-demanding at all at around 10-11 times earnings here. Net debt of $1.7 billion remains very modest, comfortably trailing EBITDA here despite continued buybacks.
In fact, these buybacks have reduced the outstanding share base further to 91 million shares, as the company recently rewarded investors with a convincing 15% dividend hike on top of these buybacks as well. With an $2.40 per share annual payout, investors receive a solid 1.6% dividend yield here as the balance sheet and business remain very resilient.
Even if current adjusted EBIT margins in the high-teens might revert to 10-15% of sales, this still is a $1.0-$1.5 billion EBIT business at current sales levels. This would still yield after-tax profit of $700 million to $1.05 billion in such case, roughly translating into an $8-12 earnings per share number. Even if margins would revert by 4% points at the minimum, multiples are still rather non-demanding.
Given all of this, I am performing a balancing act. Right now, the stock trades at just 10 times earnings after a tougher year, as lower interest rates might provide a tailwind for the housing sector into 2024. That is the good news, and if margins would revert to 10-15% on a current sales base, the company would trade at still a very reasonable multiple. Given all this, I am quite upbeat from a fundamental point of view, yet I recognize that shares have seen a great run as well, as this was just a $110 stock in October.
Amidst all this, I am happy to keep a very close eye on the shares, with a much greater appreciation and willingness to get involved on this stock as the fundamental picture looks compelling, but I recognize the momentum run seen already as well.
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