Owens Corning (OC) Up 8.4% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Owens Corning (OC). Shares have added about 8.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Owens Corning due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Owens Corning (OC) Beats Q3 Earnings & Revenue Estimates

Owens Corning reported better-than-expected third-quarter 2019 results. The company’s earnings and net sales topped their respective Zacks Consensus Estimate and improved on a year-over-year basis. The upside was backed by increased organic growth, improved operating efficiencies as well as higher contribution from the Roofing and Composites businesses. However, bearish view for the roofing industry in fourth-quarter 2019 seems to have dented investors’ sentiment.

The company reported adjusted earnings of $1.63 per share in the quarter, which beat the consensus mark of $1.51 by 7.9%. Adjusted earnings also increased 3.8% year over year owing to strong performance of the Roofing business and manufacturing productivity across the board.

Net sales of $1.88 billion surpassed analysts’ expectation of $1.84 billion by 2.2% in the reported quarter. Moreover, the metric grew 3.6% year over year on higher sales volume in the Roofing business.

Segment Details

The company has three reportable segments — Composites, Insulation and Roofing.

Net sales in the Composites segment increased 5% year over year to $531 million. Segment sales grew 6% on a constant-currency basis. Despite witnessing slower global growth, its volume grew 7%. Also, the company’s focus on higher value applications, such as specialty glass non-wovens and wind energy, led to higher demand for these products that contributed to sales growth. Earnings before interest and taxes (EBIT) margin in the quarter was recorded flat year over year at 13%, as benefits from lower furnace rebuild and start-up costs as well as higher sales volumes were partially offset by lower selling prices and higher input cost inflation.

The Roofing segment’s net sales grew 11% year over year to $713 million, courtesy of higher volumes backed by strong market growth in shingles. The U.S. asphalt shingle market grew 16% in the third quarter. EBIT margin were flat year over year at 20% in the quarter, as higher sales volumes and lower transportation costs were partly offset by lower selling prices.

Net sales in the Insulation segment came in at $693 million, down 2% year over year. The downside was mainly caused by lower sales volumes, primarily in the North American residential fiberglass insulation business as well as unfavorable currency translation. EBIT margin in the quarter under review contracted 100 basis points (bps) to 12% due to lower sales and production volumes as well as inflation.

Operating Highlights

During the third quarter, Owens Corning’s adjusted EBIT increased 3.7% to $277 million from $267 million in the year-ago quarter. Volume growth in the Roofing and Composites businesses as well as manufacturing productivity across the company led to the upside.

Balance Sheet

As of Sept 30 2019, the company had cash and cash equivalents of $35 million compared with $78 million at 2018-end. Net cash flow provided by operating activities was $309 million in the quarter, up 54.5% year over year. Moreover, free cash flow was $208 million in the quarter, up 163% year over year.

During the first nine months of 2019, net cash from operating activities came in at $596 million compared with $506 million in the year-ago period. Free cash flow was $282 million in the said period compared with $81 million in the year-ago period.

2019 Outlook

In Roofing, the company expects U.S. shingle industry shipments to be relatively flat year over year. It expects higher share of shipments and a favorable geographic mix. The company expects fourth-quarter market size for Roofing business to be lower than the prior year, based on the third quarter market performance and a tough comparison.

In Composites, the company expects growth in the glass fiber market but at a lower rate than its previous expectation. It projects increased volume and improved operating performance to offset higher inflation.

In Insulation, Owens Corning anticipates improved operating performance to boost profit in technical and other building insulation businesses. It anticipates continued positive pricing to be offset by lower volumes and production curtailments in the North American residential fiberglass insulation business.

Owens Corning estimates an effective tax rate of 26-28%. The company expects general corporate expenses in the range of $110-$115 million in 2019. Capital expenditures are expected to be approximately $460 million (compared with $475 million expected earlier). It continues to expect strong conversion of adjusted earnings to free cash flow.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -15.01% due to these changes.

VGM Scores

At this time, Owens Corning has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Owens Corning has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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