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Owens Corning Down 52% Over a Year: What's Hurting the Stock?

Zacks Equity Research

Owens Corning OC has been witnessing higher raw material and transportation costs of late. Despite being a leader in building materials systems and composite solutions, Owens Corning’s shares have declined 51.6% in a year’s time compared with the industry’s fall of 31.7%. Also, earnings estimates for 2018 and 2019 have moved south over the past 30 days, limiting the stock’s earnings growth potential.



Let’s delve deeper and try to identify the factors affecting this Zacks Rank #4 (Sell) company’s growth potential.

Dismal Third-Quarter Performance & Full-Year Guidance: During the third quarter of 2018, the company’s earnings and revenues missed the Zacks Consensus Estimate by 9.9% and 3.9%, respectively. The poor performance was mainly due to significant volume decline in the Roofing business.

Also, its Composites segment is expected to experience lower volume in the United States, European and Indian roofing market, along with high inflation in near future. Consequently, the company has lowered its full-year 2018 guidance.

In the Roofing segment, the U.S. asphalt shingle market is anticipated to decline roughly 10% in 2018. It anticipates a lower EBIT of about $260 million from the Composites segment. Moreover, for the Insulation unit, the company now expects EBIT growth of approximately $110 million, down from $150 million a year ago.

Additionally, Owens Corning trimmed its overall 2018 adjusted EBIT guidance to $855 million from the previously estimated range of $925-$975 million.

Rising Material & Transportation Cost: Despite executing strong price realization, material and transportation inflation has been negatively impacting the three businesses of the company. In the first nine months of 2018, its adjusted EBIT declined to $633 million from $640 million recorded a year ago. Adjusted EBIT margins also fell 150 basis points (bps) in the same time frame.

Notably, asphalt shingle prices have flared about 30% since the very beginning of the year. Also, transportation inflation as well as higher rebuild and start-up costs have been negatively impacting the company’s Composites and Insulation units’ operating income in the past few quarters.

Softness in Roofing Business: Owens Corning has been witnessing lower Roofing volumes over the past three quarters. In fact, its Roofing sales have declined 2% and 5% in the past nine months and third quarter, respectively.

The decline was primarily due to 9% and 15% lower shingle volumes in the past three quarters and third quarter, respectively. Moreover, the downside in the asphalt shingle market mainly stemmed from unfavorable geographic mix, which is expected to remain a headwind in the next few quarters.

Currency Concerns Prevail: During the third quarter, the company’s revenues in Composites and Insulation segment decreased 1% and 5%, respectively, due to the negative impact of foreign currency translation.

Owens Corning is exposed to foreign exchange rate fluctuation risks due to its operations in Europe and Asia-Pacific. During the third quarter of 2018, net sales in Composites decreased 1% due to the negative impact of foreign currency translation. Also, its Insulation segment is experiencing unfavorable impact of translating sales denominated in foreign currencies into U.S. dollars.

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector include KBR, Inc. KBR, United Rentals, Inc. URI and PGT Innovations, Inc. PGTI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

KBR surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with the average being 9.2%

United Rentals has an expected earnings growth rate of 53.5% for 2018.

PGT Innovations has a projected earnings growth rate of 93.4% for the current year.

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