Morningstar | Owens Corning Lowers 2018 EBIT Guidance Due to Lower Volume and Higher Input Costs
Shares of no-moat-rated Owens Corning closed the Oct. 24 trading day down almost 10% after the firm missed Wall Street's revenue and EPS estimates and lowered its 2018 adjusted EBIT guidance due to slowing volume and persistent input cost inflation. While third-quarter revenue was up 7% year over year, we calculate that the Paroc acquisition, which closed in February, accounted for all the revenue growth. Based on our analysis, sales would have been slightly down year over year excluding Paroc. Management noted that insulation volume hit a rough patch in September and is still down year over year in October; composites volume has missed internal expectations; and management expects the U.S. roofing shingle market to be down 10% in 2018 due to lower storm activity. Management's revised outlook is for $855 million of adjusted EBIT in 2018 versus prior guidance of $925 million-$975 million.Still, we thought Owens Corning's margin performance was a bright spot of the third quarter and indicative of better price realization, especially in the insulation segment, which has delivered $90 million of price improvement so far this year. Specifically, insulation EBIT margin improved 190 basis points year over year to 13.2%; composites EBIT margin improved 50 basis points year over year to 12.6%; and while roofing EBIT margin was down 190 basis points year over year to 19.7%, it did improve 40 basis points sequentially despite lower sales volume relative to the second quarter. The roofing segment's 15% first-quarter EBIT margin had us worried, but the segment has now had two consecutive quarters of above-19% EBIT margins, which we hope is a sign of margin stabilization.
While we still have a constructive view on Owens Corning's longer-term prospects, we now think our prior growth and profitability assumptions were overly optimistic. After we tempered these expectations, out fair value estimate declined 8% to $69 per share.
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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