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Owens Corning to Benefit From Acquisitions Amid Rising Costs

Zacks

Acquisitions have been integral to Owens Corning's OC growth strategy. The company strengthened its portfolio through acquisitions, which are expected to facilitate the company in driving profitability. Additionally, strong price realization and positive housing market fundamentals are encouraging.

However, raw material and transportation costs, along with lower roofing volumes raise concerns for this Zacks Rank #3 (Hold) company.

Key Growth Drivers

Owens Corning has been following a systematic inorganic strategy for enhancing its product portfolio and has wrapped up various acquisitions that contributed significantly to its growth.

On Apr 27, 2018, Owens Corning completed the acquisition of Guangde SKD Rock Wool Manufacture Co., Ltd., a mineral wool manufacturer in China. In February 2018, the company acquired Paroc — a leading producer of mineral wool insulation for building and technical applications in Europe — for approximately $1,121 million. This deal enhances its portfolio of insulation products in all three major markets — North America, Europe and China.

Notably, Owens Corning delivered strong top-line growth in the second quarter of 2018, driven by acquisitions and robust pricing actions in businesses.

Meanwhile, Owens Corning achieved strong price realization during the second quarter of 2018. Rising raw material and transportation costs have been negatively impacting businesses in North America over the past few quarters, specifically in its Roofing segment. The company expects to offset these inflationary pressures through pricing actions. Consequently, the company remains on track to achieve double-digit operating margins for all the three businesses in 2018.

The company raised its pricing forecast for 2018 from $90 million to $120 million, leading to more than $70 million estimated operating income improvement in the second half of 2018. The company expects full-year adjusted operating income outlook of $925-$975 million, backed by higher price realization.

Owens Corning relies on residential construction, as well as repair and remodeling demand, which is based on the performance of the broader housing market. Positive factors like an improving economy, modest wage growth, low unemployment levels and solid consumer confidence raise optimism on the housing sector as well as company’s future performance.

Causes of Concern

Meanwhile, shares of Owens Corning have lost 31.9% over a year, comparing unfavorably with the industry’s 5.3% decline. Increased raw material and transportation costs are dampening Owens Corning’s performance. Adjusted operating income declined approximately 7% year over year in the second quarter. For the Composites segment, it expects 2018 operating income to be slightly below the 2017 level due to higher manufacturing costs, greater inflation and lower volume.


Moreover, the company expects the U.S. asphalt shingle market to be down mid-single digits in 2018 in Roofing segment.

Adverse shipment timings and geographic mix have also been hurting roofing volumes. In the second quarter of 2018, its Roofing sales declined 4%. Although the shipment timing is expected to end soon, geographic mix is likely to remain a headwind.

Stocks to Consider

Some better-ranked stocks from the same industry include Continental Building Products, Inc. CBPX, PGT Innovations, Inc. PGTI and NCI Building Systems, Inc. NCS. While Continental Building and PGT Innovations sport a Zacks Rank #1 (Strong Buy), NCI Building carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Continental Building’s earnings for 2018 are expected to increase 52.6%.

PGT Innovations’ 2018 earnings are expected to grow 78.7%.

NCI is expected to record 81.3% earnings growth in fiscal 2018.

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