Owens Corning Writes New Chapter

12/09/2010 12:34 pm EST


George Putnam

Editor, The Turnaround Letter

George Putnam III, editor of The Turnaround Letter, recommends the building materials maker as in an inexpensive play on the eventual housing recovery.  

Founded in 1938, Owens Corning (NYSE: OC) is a leading manufacturer of building products, including insulation, roofing products, and composite materials. From the early 1950s through the early 1970s some of the company’s insulation products contained asbestos. This led to massive legal liabilities in the 1990s, which forced the company to file for bankruptcy in October 2000. Like most of the asbestos-related cases, Owens Corning’s Chapter 11 proceedings were protracted and contentious.

The company finally emerged from Chapter 11 in October 2006, just as the residential construction market was beginning to soften. Shortly thereafter, commercial construction faltered as well. The stock is only now getting back to the levels where it first traded after the exit from bankruptcy.

Owens Corning is a very high-quality company, but its markets remain quite depressed. It is the North American leader in residential and commercial insulation, as well as in a number of roofing products. One of the bright spots for the company is composites, where it is a global leader. (Composites are fabric and reinforcing materials used in a variety of aerospace, construction, and industrial applications.)

Roofing Regains Footing
Revenues in the roofing sector have rebounded and leveled off after a drop in 2007. However, with cost cutting and efficiency gains, the company has been able to bring the roofing division back to solid profitability. Insulation remains weak. Revenues have fallen about 35% since 2006, and the division is still losing money.

Composites revenues and profits grew steadily until hitting a speed bump during the 2008-09 global economic downturn, but they are rebounding rapidly. Moreover, Owens Corning has strong positions in some of the fastest growing international markets such as Brazil, Russia, India, and China.

Debt Cut, Buybacks Under Way
The company has a decent and improving balance sheet. It has solid cash flows and has reduced net debt by $500 million over the past five quarters. Owens Corning is also using some of its cash flow to directly benefit shareholders through stock buybacks—$100 million during the last quarter alone.

The stock looks quite cheap, particularly for a company with such a strong business franchise in a temporarily depressed sector. The stock is currently trading at about 20 times estimated 2010 earnings, which looks very reasonable given the weakness in the construction industry. We expect profits to grow nicely as the building sector gradually recovers, and recommend buying Owens Corning up to $35. [Shares closed at $28.77 Wednesday—Editor.]

[Putnam’s been hot. His pick last month of a regional bank stock is up 8% in 30 days. Back in July, he recommended another housing play, a home builder. The stock has since gained 26%—Editor.]  

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