EUR 850.00 For Business Accounts Only

Morningstar | Owens Corning's 1Q Results Weren't Great; We're Hopeful for a 2H Improvement

Shares of no-moat-rated Owens Corning sold off on April 24 following the firm's disappointing first-quarter earnings release. Reported sales of $1.7 billion declined almost 1.5% year over year, adjusted operating income fell nearly 24% to $116 million, and adjusted EPS of $0.54 was 34% lower than the year-ago quarter. All three metrics missed consensus expectations. Paroc, which was acquired in early February 2018, contributed a full three months of sales during first-quarter 2019 compared with about two months during first-quarter 2018. Excluding $38 million of Paroc-related inorganic revenue during the quarter, Owens Corning's organic sales declined almost 4% year over year.

Owens Corning's first-quarter sales were negatively affected by lower insulation and roofing volumes, which were down 8% and 10%, respectively, and unfavorable foreign currency translation. Insulation volumes, which lag housing starts by 90 days, were down due to weaker new construction activity. Roofing volumes were down due to a combination of less carry over storm-related replacements, weaker new construction, and the timing of shipments relative to last year. While the firm was able to raise insulation and roofing prices, it wasn't enough to post year-over-year consolidated sales growth. Consolidated adjusted operating margin contracted 200 basis points to 7% due to the aforementioned lower insulation and roofing volumes and higher composites input costs.

We've lowered our fair value estimate by 3% to $65 per share due to our downward-revised 2019 sales and operating margin assumptions. We're now projecting about 1% sales growth and an 11% operating margin in 2019 versus our previous forecast of 3% growth and a 12% operating margin.

While the company does share its outlook each quarter, in our view, it can be quite vague and open to interpretation. Still, based on management's commentary, we think the company's performance can improve during the second half of 2019.

Management said its second-half outlook for its insulation business is stronger due to its expectation that housing starts will improve. Based on our analysis of myriad housing data and recent homebuilder commentary, we too think housing starts will improve in the latter part of 2019.

Management also noted that roofing volumes, which had a slow start in early 2019, were very strong in March and that strength continued into April. While first-quarter roofing margins were particularly disappointing (down 300 basis points to 12.1%), management said that roofing operating margins in March "were consistent with long-term guidance." Management said during its November 2017 analyst day that the sustainable operating margin for the roofing business is approximately 20%. The roofing segment last flirted with a 20% operating margin during its third-quarter 2018, when the segment achieved a 19.7% operating margin.