Owens Corning Affected By Reversions In Stock Administration (NYSE:OC)

Revealed on the Worth Lab 11/10/22

Owens Corning (NYSE:OC) continues to be seeing phenomenal quarters, however it’s being considerably pushed by pricing. Volumes are starting to see strain. The prime perpetrator is reverting stock administration practices, however it’s also softening in some key markets, particularly Europe and China, affecting composite companies but in addition insulation extra broadly. Pure disasters are serving to roofing just a little, and this phase seems to be sturdy along with North American insulation. The international exposures are at present an idiosyncratic weight, and margin strain is predicted in composites. Backlogs stay sturdy in mixture throughout composites however price is catching up. Nonetheless, cracks aren’t precisely displaying, the secular image is powerful and it’s supporting present outlook and fundamentals.

Fast Q3 Notice

Each phase noticed development by way of volumes, even composites which noticed a divestment of the DUCS (chopped strand for fiberglass) enterprise in Europe which accounts for about 4% of the phase income. For composites, development continued regardless of strain from China, which is sort of 10% of that phase’s income too and drives nearly all of the China publicity within the combine, the place the opposite huge APAC market is India which has been going sturdy. Income development was 8% and EBIT development was 25%. Pricing was accountable for all of development, volumes declined YoY. Nonetheless, on mixture backlog is kind of the identical as six months in the past regardless of strain from China and Europe, with the assistance of excellent US growth and growth in India. This backlog will nonetheless be liquidated at incrementally decrease margins as value can not proceed to outpace rampant European inflation, and volumes wrestle in a COVID lockdown China. Nonetheless, sturdy backlog evolutions are an excellent signal for a typically extra cyclical phase, and signifies {that a} portion of the present quantity results are extra momentary associated to reversal in conservatism in stock administration.

All different segments noticed declining volumes aside from the North American insulation enterprise which noticed flat volumes. Pricing was essential to offset all quantity strain and was constructive in all segments, driving virtually all the income development. Roofing, whereas it noticed quantity declines, along with insulation is predicted to provide increased revenues for the This fall, and due to this fact for the total yr. Roofing was supported considerably by incidence of hurricanes however that was offset by lessened hail in different markets like Colorado.

Remarks

Roofing and insulation drive North American revenues within the combine. Generally, the macro query about differentials between Europe and North America are important. North America is sporting a shrinking present account deficit because it weaponises the greenback and creates worth out of its commodities, and it’s clear throughout our protection that US markets should not demonstrating typical recessionary declines, the place Europe and naturally China, which continues to be being affected by lockdowns, clearly is.

North America continues to reveal sturdy secular fundamentals. Whereas there might be a reset available in the market as charges do have an effect on the housing and development business as it’s by definition leveraged, housing begins are nonetheless outpacing completions, which implies inventories are nonetheless low for housing, and engagements are nonetheless excessive for residential development, clearly being pushed by the bottleneck of completion. OC capability continues to be working at prime charges, and that is more likely to proceed. On Looking for Alpha we cowl Westlake (WLK) with the same view, and whereas they function at a later stage within the constructing cycle, and new gulp of enterprise is coming via for operators on the earlier stage like insulation and roofing gamers. The identical can’t be stated for Europe which lacks the identical longer-term drivers whereas additionally faltering within the rapid time period.

We attribute a premium to the North American exposures, the place demographics in addition to present housing shortages are a tailwind. OC trades at virtually the identical valuation as Saint-Gobain (OTCPK:CODGF) on a EV/EBITDA foundation (each commerce at a 4.3x), an organization which is generally Europe-focused. Deserving of a premium on geography alone, we might say OC is comparatively undervalued. Furthermore, insulation is a extra worthwhile market than the specialty chemical compounds and different constructing merchandise that Saint-Gobain has within the combine. Furthermore, Saint-Gobain has much less defensible markets in automotive. All these are the reason why OC is more likely to be extra resilient, and maybe deserving of an excellent heavier premium. Furthermore, reversals in stock administration practices might easy out quantity declines even when the recession will get a lot worse within the US, which is might as layoffs do proceed in some key industries. Nonetheless, the markets are risky and housing is a harmful space to name. We go for now.