Owens Corning: Up on the Roof
12/20/2017 5:00 am EST
We are initiating coverage of Owens Corning (OC), a leading manufacturer of composite and building materials, with a buy rating, notes analyst Michael Jaffe of Argus Research, Wall Street's leading independent research firm.
Although Owens Corning is a cyclical company subject to changes in the housing and construction markets, we believe that conditions in these markets remain strong and expect the company to post solid results over the next several years.
We believe that Owens Corning is in the midst of a solid business upturn, driven by improvement in its core markets, that should continue for several years. We also expect the company to benefit from business expansion efforts and recent acquisitions.
In April 2016, Owens Corning acquired InterWrap, a producer of roofing underlayment and packaging materials, for $452 million, net of cash acquired. The transaction strengthened OC’s presence in roofing components.
In June 2017, the company acquired Pittsburgh Corning, which produces FOAMGLAS cellular glass, a high performance water-, fire-, and pressure-resistant insulation.
By our calculations, the 2018 P/E ratio is 16.9, slightly below the market multiple. Earnings are now expected to rise 10.9% in 2018 and 15.0% in 2017 after declining 3.3% in 2016. The sector’s debt/cap ratio of 50% is above the market average, as is the average yield of about 2.2%.
On valuation, Owens Corning shares are trading at 16.9-times our 2018 EPS estimate, below the average of 27.7 for peer building products companies, and at a PEG ratio of 1.2, below the peer average of 2.2. However, we believe that the stock merits higher multiples based on our expectations for 14% annual earnings growth over the next five years, above the peer average of 12.6%.
Our target price of $109 implies a PEG ratio of 1.5, still below the peer average, and a total potential return, including the dividend, of 25% from current levels.