EUR 850.00 For Business Accounts Only

Morningstar | Owens Corning Off to a Slow Start in 2019; Improving Housing Market Should Result in Better 2H

During the late 2000s, Owens Corning, a leading manufacturer of fiberglass insulation, roofing shingles and components, and glass fiber composites, took a beating due to the perfect storm of the steepest housing contraction in U.S. history and the mistimed emergence of Chinese glass fiber capacity. However, the firm has since recovered, as EBIT margins have improved from 2.9% in 2012 to 11.6% in 2018, although 2018 was a more challenging year than management expected due to inflationary pressure and softer-than-expected demand.Although tough competition and Owens Corning’s high capital intensity and fixed costs make it difficult for the firm to generate sustainable excess returns over the business cycle, we see an opportunity for the company to earn economic profits over the coming decade.We think Owens Corning’s most profitable roofing business has the strongest competitive advantages, and we think the segment can maintain operating margins in the high teens over the next decade, thanks to favorable new construction and replacement activity, as well as a growing mix of high-margin roofing components sales. The insulation business, which has a less flexible operating model than roofing and is more dependent on capacity utilization, averaged 15% operating margins between 1985 and 2008, but margins fell off a cliff during the housing recovery and have been slow to recover. Despite a disappointing 2018 for U.S. housing, we remain bullish on the long-term outlook for new residential construction, and we think increased housing starts, paired with stricter building codes (which require more insulation), will result in better capacity utilization and allow the insulation business to maintain double-digit operating margins. In recent years, Chinese glass fiber composite capacity additions have slowed, leading to capacity utilization rates at or above 90%. We expect that growing end-market demand and Owens Corning’s continued product innovation will support better pricing, while the company’s investments in a low-cost manufacturing network and partnerships with Chinese manufacturers will lower its cost structure.