2023-04-19 09:23:00 ET
Summary
- Owens Corning has been able to steadily increase revenues over the last several years, and it doesn't seem to be slowing down either.
- The company has a strong cash flow margin which makes them able to return around 50% of that to shareholders through various means.
- The management has made it clear they are committed to creating long-term value for shareholders, and this heavily supports my buy rating.
Investment Summary
Owens Corning ( OC ) might have had a few years of rapid growth but is it changing as the building projects permits are starting to decline on a YoY basis? OC has managed to build up a strong cash position thanks to heightened free cash flows because of the construction demand that has been ongoing for the last few years . I think this has lent the company to be in a great position to weather any coming storm and still provide value to shareholders through both dividends and buybacks, both of which they have been clear they are committing to.
This shareholder-friendly approach I think makes the company a good place to store capital right now as the market seems to still remain irrational in some companies' valuations. On the side of OC, their future p/e is decreasing, and I think the company is at a good entry point despite the uptrend that started in September last year.
A Shareholder Pro Approach
As I mentioned in the beginning paragraph, OC is a company that has made it clear to investors that they want to distribute some of the profits through raised dividends and large share buybacks. In December 2022, they raised the dividend by nearly 50% which might make you think about how reliable that is in the long term. Well, when the company generates above $1.2 billion in levered cash flows with a margin of 12.47% and consistently growing , I think they are in a great position to keep increasing the dividend each year.
Besides the raised dividend, the share buyback program got a large bump as well. It got increased by 10 million shares authorized to purchase, which comes at the back of 7.4 million shares remaining available for purchase. Used up in 2023 that would bring the outstanding shares down almost 20% to around 79 million outstanding. I think this really underlines and supports the strong investment opportunity of OC. But what about overpaying for the shares they are planning to repurchase? Well, I mentioned before the company is trading at a very cheap valuation that seems to be decreasing YoY also as the earnings are expected to continue increasing. Around 10x forwarding earnings compared to the sector's average of 16 doesn't make me worried the management is making a reckless decision.
Risks
I think that one of the risks of investing in Owens Corning might be slowing projecting revenues. While the revenues aren't expected to drop off, the same 7% CAGR between 2013 and 2022 is unlikely to strongly continue. In an investor presentation by the company, they projected to reach $10 billion in revenues by 2024. That would only be an increase of around 2% from 2022 numbers.
I think that the lacking revenue growth might be a cause for the lower valuation the company is getting. The company would be able to generate more than its current market cap in revenues, if those predictions come true which of course would help sustain a strong dividend the reason to see a richer valuation, won't be there in my opinion.
I think the predictions of slowing construction activity will unfortunately make the estimated slowing revenues a reality. I think that it instead will be important to see that the company isn't taking on any more debt to help hedge against this slowing in revenues as they try and keep capital allocations the same as in previous years.
Financials
Looking at the balance sheet of Owens Corning I think they are in a very healthy place right now. The total assets have seen a yearly increase, which is caused by increased inventories and a large cash position, primarily. I think those are healthy moves to see. A larger cash position is important if revenues are expected to start slowing down. It will make the company able to keep up with the competition as it can continue making strategic acquisitions and investments into the company. On the other side, it will be very interesting to see whether the ROA takes a hit as revenues slow down and the inventories are starting to increase. If demand starts slowing down significantly, perhaps then the increasing inventories will begin to be a liability instead.
Looking at the long term, they seem very manageable at just under $3 billion in total. The cash can pay off a third and with 2 years of the current free cash flows, they would be able to be debt free. This potential is part of why I think the company is in a healthy place financially right now. What makes me further confident in the company is that increasing debt has not really been necessary year-over-year. Increasing just $30 million whilst net sales increased by 15%.
Valuation & Wrap Up
Right now I think OC offers little downside risk as the forward p/e sits at just around 10, well below the sector's average of 16. What has been mentioned frequently throughout this article is the shareholder-friendly management in the company, and that is what I think a large part of investing in the company will be based on. With shares outstanding expected to drop quite drastically as the company makes announcements of more buybacks makes, I think there is a lot of appreciation for investment here.
Raising the dividend is also very possible as the free cash flows remain strong, and the healthy balance sheet helps support moves like this too as the debt seems very manageable. Looking at a company like Lennox International Inc. ( LII ) which also has exposure to the construction industry and the either increasing or decreasing demand for it, I think OC offers the better opportunity. They seem to be trading at a big discount to many companies in the sector as a whole. To make a conclusion about the company, I think they are at a great entry price right now. I'm confident an investment will appreciate thanks to the large buybacks and the generous yet sustainable dividend yield.
For further details see:
Owens Corning: Doesn't Get Much More Shareholder Friendly Than This