Morningstar | Owens Corning Has Another Tough Quarter, But Management Sees Improved 2H Performance. See Updated Analyst Note from 26 Jul 2018
Shares of no-moat-rated Owens Corning traded down about 9% on July 25 after the firm reported disappointing second-quarter results. While reported revenue was up 14% year over year to $1.8 billion, we calculate that organic revenue growth was less than 2%. Even with the sales contribution from acquisitions, revenue missed the consensus estimate by about $33 million. While organic sales growth was relatively tepid, we think Owens Corning's significant earnings miss triggered the sell-off. The firm's adjusted EPS of $1.17 missed the $1.45 consensus estimate by a wide margin and declined $0.02 year over year. Like the first quarter, rising raw material and freight costs were the main culprits behind Owens Corning's disappointing profitability. After two consecutive quarters of disappointing margin performance, we've concluded that our near- to midterm operating margin assumptions were overly optimistic. As such, we've tempered those assumptions, which resulted in our fair value estimate falling to $75 per share from $80.Insulation reported revenue grew 55% year over year and over 10% excluding acquisitions. The segment's organic growth benefited from higher prices and volumes. Insulation operating margin of 7% was about flat with the year-ago quarter. Roofing revenue declined about 4% year over year due to lower volume that more than offset higher pricing. Roofing operating margin contracted 340 basis points to 19.3% due to higher asphalt and freight costs. Composites revenue came in about flat with the year-ago quarter and operating margin contracted 250 basis points to 13.1% due to costs related to equipment rebuilds and a melter failure.
Despite a tough first half, management expects improved back-half performance from the insulation and roofing segments due to increased pricing. Management expects the insulation business to increase EBIT by over $150 million year over year and roofing margins to return to 20% in the second half of 2018.
Owens Corning is engaged in manufacturing and delivering a range of insulation, roofing, and fiberglass composite materials. The company's Composites segment includes vertically integrated downstream activities. The company manufactures, fabricates and sells glass reinforcements in the form of fiber. The company's Insulation segment includes a portfolio of high, mid and low-temperature products with a geographic mix of United States, Canada, Europe, Asia-Pacific and Latin America, a market mix of residential, commercial, industrial and other markets, and a channel mix of retail, contractor and distribution. The company's products in the Roofing segment are laminate and strip asphalt roofing shingles.
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