It has been about a month since the last earnings report for Owens Corning (OC). Shares have lost about 4.4% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Owens Corning due for a breakout? 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 catalysts.
Owens Corning (OC) Q2 Earnings & Sales Beat, Up Y/Y
Owens Corning reported better-than-expected results in second-quarter 2019. The company’s earnings and net sales not only topped the respective Zacks Consensus Estimate but also improved on a year-over-year basis, buoyed by increased organic growth, improved operating efficiencies and higher contribution from the Roofing business.
It reported adjusted earnings of $1.31 per share in the quarter, beating the consensus mark of $1.13 by 15.9%. Adjusted earnings also increased 11% year over year owing to strong performance of the Roofing business and manufacturing productivity across the board.
Net sales of $1.92 billion surpassed analysts’ expectation of $1.83 billion by 5.1% in the reported quarter. In addition, the top line was up 5.2% on a year-over-year basis, attributable to higher sales volume at Roofing.
The company has three reportable segments, namely Composites, Insulation and Roofing.
Net sales in the Composites segment declined 1% year over year to $535 million. Despite slower global growth, particularly in Europe, North America and global automotive markets, sales volume increased 4% year over year in the quarter. However, this growth was offset by unfavorable foreign currency translation. Earnings before interest and taxes (EBIT) margin was flat year over year at 13%. Manufacturing productivity gains and higher sales volumes were offset by higher input cost inflation and negative foreign currency.
The Roofing segment’s net sales grew 18% year over year to $778 million, courtesy of higher volumes (up 13%) and selling prices. EBIT margin remained flat year over year at 19% in the quarter. Production volumes also remained relatively flat in the quarter. Higher pricing was offset by inflation in the reported quarter.
Net sales from the Insulation segment came in at $661 million — down 3% year over year — mainly due to lower sales volumes, primarily in the North American residential fiberglass insulation business and negative foreign currency translation. This was partly offset by higher selling prices. EBIT margin in the quarter under review contracted 100 bps to 6%.
During the second quarter, Owens Corning’s adjusted EBIT increased 7.9% to $231 million from $214 million in the year-ago period. Solid commercial execution, strong manufacturing gains and disciplined cost control across the company led to the upside.
As of Jun 30, 2019, it had cash and cash equivalents of $92 million compared with $78 million at 2018-end. Net cash flow provided by operating activities was $438 million in the quarter, up 10.6% year over year. Moreover, free cash flow was $323 million in the quarter, up 67.4% year over year.
During the first six months of 2019, net cash used for operations came in at $287 million compared with $306 million in the comparable year-ago period. This has resulted in free cash flow of $74 million versus $2 million in the year-ago period.
Full-Year 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.
In Composites, although the global industrial production growth outlook has softened, it expects growth in the glass fiber market. The company 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 within $125-$135 million in 2019. Capital expenditures are expected to be approximately $475 million (versus $500 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, estimates review have trended downward during the past month.
At this time, Owens Corning has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
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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