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Owens Corning Sees Bright Future
Owens Corning (NYSE:OC) believes that the company could put out more than $1 billion in free cash flow over the next three years, as the industry recovers from one of the sharpest downturns ever seen. This optimistic view is based in part on U.S. housing starts reaching an annual rate of one million units by 2013, providing a lift to the company's businesses.
IN PICTURES: 7 Tips On Buying A Home In A Down Market
Building Materials
The Building Materials Group is the largest part of Owens Corning, with just over $3 billion in sales over the last 12 months. This segment includes roofing and insulation products for the residential, commercial and industrial markets.
Insulation
Owens Corning is the largest producer of fiberglass insulation, a $2 billion market dominated by Owens Corning and two other large competitors. The company is also the number two producer of extruded polystyrene foam insulation. This market is smaller, at $600 million. The insulation business was slammed by the recent recession with EBIT margins declining to negative 8%. Historical margins usually run between 10% and 20% for this segment. Even with the slight recovery in the economy and housing market, this industry is still weak. Owens Corning's network is running at only 50% capacity utilization in 2010.
Owens Corning competes with several large companies in the building materials segment, including Dow Chemical (NYSE:DOW) and Johns Manville, which is owned by Berkshire Hathaway (NYSE:BRK.B).
Roofing
The Roofing business has done well over the last few years, despite the recession and leverage to housing. Revenues were approximately $1.9 billion over the last 12 months, and EBIT margins remained positive here during the recession. The steep slope roofing market is approximately $8 billion in size, and is supported by new home sales, as well as repairs due to the aging of the housing stock. The company's main product here is asphalt shingles, which is the product of choice for approximately 70% of those who are installing or repairing a roof.
One reason that Owens Corning likes the asphalt shingles business is that it has consolidated over the years, with four companies controlling 90% of the market. Volume here industry-wide is at a 15-year low, and has been declining since it peaked in 2005. Prior to the decline, the market grew at a compound annual growth rate of 3%.
Composites
Owens Corning also has a Composites business, which includes products that contain glass along with resin, fillers and other additives used for reinforcement purposes. The company is looking for growth in this business from the emerging economies, and is planning capacity additions in China. Owens Corning competes with PPG Industries (NYSE:PPG) in the composites business.
Financial
Owens Corning is currently rated investment grade and has made a commitment to maintain that rating. The company has reduced its net debt by $500 million over the last six quarters, and has no major debt maturities until 2014.
Owens Corning also has substantial deferred tax assets in the form of net operating losses that can be utilized by the company to reduce cash taxes. The company estimates that the present value of the net operating losses is approximately $650 million or $5 per share.
The Bottom Line
Owens Corning believes that the company can put out more than $1 billion in free cash flow from 2011 to 2013, as the housing market recovers from the deepest downturn in a generation. (For a history lesson, check out The Fuel That Fed The Subprime Meltdown.)
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IN PICTURES: 7 Tips On Buying A Home In A Down Market
Building Materials
The Building Materials Group is the largest part of Owens Corning, with just over $3 billion in sales over the last 12 months. This segment includes roofing and insulation products for the residential, commercial and industrial markets.
Insulation
Owens Corning is the largest producer of fiberglass insulation, a $2 billion market dominated by Owens Corning and two other large competitors. The company is also the number two producer of extruded polystyrene foam insulation. This market is smaller, at $600 million. The insulation business was slammed by the recent recession with EBIT margins declining to negative 8%. Historical margins usually run between 10% and 20% for this segment. Even with the slight recovery in the economy and housing market, this industry is still weak. Owens Corning's network is running at only 50% capacity utilization in 2010.
Owens Corning competes with several large companies in the building materials segment, including Dow Chemical (NYSE:DOW) and Johns Manville, which is owned by Berkshire Hathaway (NYSE:BRK.B).
Roofing
The Roofing business has done well over the last few years, despite the recession and leverage to housing. Revenues were approximately $1.9 billion over the last 12 months, and EBIT margins remained positive here during the recession. The steep slope roofing market is approximately $8 billion in size, and is supported by new home sales, as well as repairs due to the aging of the housing stock. The company's main product here is asphalt shingles, which is the product of choice for approximately 70% of those who are installing or repairing a roof.
Composites
Owens Corning also has a Composites business, which includes products that contain glass along with resin, fillers and other additives used for reinforcement purposes. The company is looking for growth in this business from the emerging economies, and is planning capacity additions in China. Owens Corning competes with PPG Industries (NYSE:PPG) in the composites business.
Financial
Owens Corning is currently rated investment grade and has made a commitment to maintain that rating. The company has reduced its net debt by $500 million over the last six quarters, and has no major debt maturities until 2014.
Owens Corning also has substantial deferred tax assets in the form of net operating losses that can be utilized by the company to reduce cash taxes. The company estimates that the present value of the net operating losses is approximately $650 million or $5 per share.
The Bottom Line
Owens Corning believes that the company can put out more than $1 billion in free cash flow from 2011 to 2013, as the housing market recovers from the deepest downturn in a generation. (For a history lesson, check out The Fuel That Fed The Subprime Meltdown.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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