Owens Corning (OC) Down 47.9% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Owens Corning (OC). Shares have lost about 47.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Owens Corning due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Owens Corning Q4 Earnings Beat Estimates, 2020 View Strong

Owens Corning reported better-than-expected results in fourth-quarter 2019. The top and bottom lines topped their respective Zacks Consensus Estimate but declined on a year-over-year basis.

Inside the Headlines

In the quarter under review, the company reported adjusted earnings of $1.13 per share, beating the consensus mark of $1.11 by 1.8%. However, the said figure declined 18.1% year over year. Net sales of $1.69 billion surpassed analysts’ expectation of $1.68 billion by 0.6% in the reported quarter. However, the metric fell 1.9% year over year due to pricing headwinds, and modest declines in technical insulation in Europe and the U.S. shingle market.

Segment Details

Net sales in the Composites segment dropped 0.2% year over year to $480 million. Segment sales grew 6% on a constant-currency basis. Despite slower global growth, composites volumes moderately outpaced the broader market. Earnings before interest and taxes (EBIT) margin in the quarter was $56 million, in line with the year-ago period. Continued strong commercial and operational performance was more than offset by input cost inflation, unfavorable currency, and a competitive price environment.

Insulation segment’s net sales came in at $723 million, down 1% year over year. The downside was mainly caused by lower sales volumes in the technical and other building insulation business in Europe, as well as foreign currency headwinds. EBIT margin in the quarter under review contracted 400 basis points (bps) to 12% due to continued curtailment costs and lower volumes.

The Roofing segment’s net sales also declined 3% year over year to $529 million, courtesy of slightly lower shingle volumes and moderately low selling prices. U.S. asphalt shingle shipments were down 5% from the prior year. EBIT margin, however, improved 100 bps in the quarter, as seasonal decline in asphalt and transportation costs was partly offset by lower prices.

Operating Highlights

During the fourth quarter, Owens Corning’s adjusted EBIT decreased 10.5% to $204 million from $228 million in the year-ago period. The downside was mainly due to unimpressive performance of the insulation business.

Balance Sheet

As of Dec 31, 2019, the company had cash and cash equivalents of $172 million compared with $78 million at 2018-end. Net cash provided by operating activities was $1,037 million in 2019, up from $803 million a year ago. Free cash flow was $590 million compared with $266 million in the year-ago period. In 2019, the company bought back 1 million shares of common stock for $48 million.

2019 Highlights

In full-year 2019, adjusted earnings came in at $4.54 per share, which missed the consensus estimate by 1.1% and declined 8.1% year over year. Net sales of $7.16 billion were up 1.5% from a year ago.

2020 Outlook

Backed by favorable environment conditions for global industrial production, strong U.S. housing starts, and global commercial and industrial construction indices, the company provided a solid 2020 view.

In Roofing, the company expects U.S. shingle industry shipments to be relatively flat year over year, given average storm demand. Meanwhile, the newly effective International Maritime Organization’s 2020 regulations on marine sector emissions are currently not expected to have a significant impact on the business’ asphalt costs.

In Composites, the company expects the glass fiber market to be weak in the first half but regain strength in the second half of the year. Notably, Owens Corning will continue to focus on growth in higher-value downstream applications and delivering strong operating performance.

In Insulation, it anticipates favorable market conditions in the U.S. new residential construction, and modest growth in global construction and industrial markets. Also, it anticipates solid earnings improvement, backed by volume growth and operating leverage in the North America residential fiberglass insulation business. Continued earnings improvement in technical and other building insulation businesses will add to the positives.

Owens Corning estimates an effective tax rate of 26-28%. The company expects general corporate expenses in the range of $125-$135 million in 2020. Capital expenditures are expected to be $460 million. Interest expenses are likely to be $115 million. It continues to expect strong conversion of adjusted earnings to free cash flow. At the end of 2019, 3.6 million shares were available for repurchase under the current authorization. Owens Corning intends to return at least 50% of free cash flow to its shareholders over time.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -12.83% due to these changes.

VGM Scores

Currently, Owens Corning has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Owens Corning has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.