Owens Corning

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Owens Corning is a global building and construction materials leader, primarily known for its insulation, roofing, and composite products, operating across residential, commercial, and industrial markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Owens Corning’s business is inherently tied to the construction and renovation cycle, making it somewhat sensitive to broader economic conditions.

Business Overview

Owens Corning (OC) is a global leader in building and industrial materials, operating through three main segments:

  1. Composites: This segment manufactures glass reinforcements used in composites, such as those used in automotive parts, wind turbine blades, and pipes. This area is known for its more technical and customized offerings.
  2. Insulation: The company provides insulation products for thermal and acoustic insulation, used in residential and commercial construction. These products are essential for energy efficiency, and this area accounts for a large portion of their profits.
  3. Roofing: They provide various residential and commercial roofing products including asphalt shingles, roofing accessories, and composite roofing materials. They have been the market leader for many years here.

Owens Corning operates in 33 countries, with about 18,000 employees and 159 facilities (manufacturing, distribution, sales and R&D). Their operations are concentrated in the US and Europe, with growing presence in Asia.

Competitive Landscape

A significant theme that emerged during the analysis of several sources was that Owens Corning operates in markets with a mix of commoditized and differentiated products, and has competitors who will sometimes operate through very low prices, thus leading to intense competition for most of the company’s product offerings.

The competitive landscape varies significantly depending on the segment:

  • Insulation: Highly competitive, with several players including Johns Manville, Knauf, and CertainTeed. Differentiation is tough and largely based on quality, and the lowest-cost producer has a big advantage.
  • Roofing: Similar to insulation in that the market is competitive with a few large players as well as many small ones. But there is some brand loyalty here, so a company with an established brand name has a slight competitive advantage.
  • Composites: This area is more technical and less commoditized, with a focus on specialized products. Competition is based on material expertise, customer relationships, and capabilities.

Moat Assessment

Based on my research, I am giving Owens Corning a moat rating of 3 out of 5, with the following justification:

  1. Intangible Assets: Owens Corning has long history and strong brand recognition, in particular within the roofing and insulation markets, which is something new entrants will struggle to overcome, especially since they have been in the market for many years.
  2. Cost advantages: OC has some scale advantages which means better margins and the company has been operating more efficiently in the last years. They are also becoming more disciplined in how they manage capital as well. They are also trying to make their supply chain more resilient.
  3. Switching Costs: Switching costs are low for consumers as product specifications for insulation and roofing are pretty similar across all competitors, making it easy to switch. For the Composites area, though, the specialized, customized product offerings mean there are higher switching costs.
  4. Network Effects: The network effect isn’t apparent in the company’s business.
  5. Financial Performance: The company has solid financial results. However, the nature of building material demand is cyclical, thus making the returns and profits volatile.

Moat Rating: 3/5

Risks to the Moat and Business Resilience

  1. Commoditization: Many of OC’s products, especially in roofing and insulation, are commoditized, making them vulnerable to price competition. This commoditization limits their ability to charge premium prices and maintain high margins.
  2. Raw Materials Costs: The prices of raw materials (like glass and asphalt) are volatile and difficult to predict, which can significantly impact the company’s input costs and their profitability. Rising energy and transportation costs will also have an impact in margins.
  3. Cyclicality: The building and construction industry is highly cyclical, meaning that OC’s revenue and profitability will vary along with the economy. During downturns in construction activity, OC will experience lower profits, and the company’s earnings are also tied with the housing cycle (especially for roofing and insulation).
  4. Technological Disruption: New technologies might disrupt how things are built and installed and may require OC to have to alter their business or adapt very quickly to these new technologies. This also includes substitutes that can do a similar job, and if those technologies become more efficient it can create a risk for them as well.
  5. Competition: New entrants or existing competitors that can more aggressively try to take market share, either from lowering prices or being more innovative.

Business Resilience

Owens Corning has a strong track record and is well-positioned in the market to deliver value, however, this market is exposed to significant volatility, and this means the company also faces that volatility, and so the company has to be very nimble and efficient to tackle the ever-changing challenges.

Financial Analysis

The company’s financials have improved greatly since the financial crisis, with revenue and earnings growing steadily, and management has stated the focus on profitability improvements is key to the strategy going forward.

  • Revenue Trends: Revenues have increased steadily over the past years, driven by growth in the residential construction and remodeling markets, as well as by acquisitions. The pandemic greatly affected the numbers in a good way, but recent data has shown there is a slight cooling off in demand, therefore there is going to be a slowdown.
  • Profitability: The company is working to increase margins, has a strong focus on cost and is now trying to focus on their own ability to manufacture products more efficiently. They have set a target to reach double-digit returns and are actively focusing on their operations to reach their target.
  • Balance Sheet: The company is in good financial health with a relatively low debt and an adequate liquidity.
  • The company has a net debt balance of $2.3 billion.
  • They also have about $2.3 billion in cash, meaning that their net debt is really just about their interest payment obligations. - They have more cash and less debt than before, meaning they have a very solid balance sheet.
  • They have a debt-to-capitalization ratio of about 38%, which is a reasonable number and indicates that they are in good shape to face a downturn.
  • Cash Flow: Free cash flow has improved quite a lot in the recent years, indicating better efficiency and returns.

10Q Results (September 2023)

  • Net Sales: Net sales are down by 7% YoY, attributed to lower pricing and lower volumes.
  • Operating Profit: Operating profits were down $131 Million YoY, which was down due to the lower sales and higher raw material costs, however, this has been slightly offset by restructuring and cost cutting measures.
  • Earnings per Share: Diluted EPS is $3.21 vs $3.52 YoY.
  • Debt: They have $3.3 billion in net debt at the moment.
  • Outlook: They expect demand to be lower overall across their segments, which will affect future earnings. The company has reiterated its cost savings of around $200 million to help cushion the drop in revenue.

Understandability Rating

Based on the complexity of the company’s business operations, I would rate its understandability as 2 out of 5. While it has 3 simple divisions, the interplay between each of them makes it complicated. Moreover, understanding how external factors affect the company (such as supply chain issues, government regulations, and technological innovation) requires some industry specific knowledge.

Balance Sheet Health Rating

Considering Owens Corning’s overall financial position and leverage, as well as the improved debt position I give it a rating of 4 out of 5. Although they are impacted by interest rates, the amount of cash and lower debt is a good sign for the company. It has solid liquidity and its debt is not something to worry about that is going to threaten their stability. They are still in the process of bringing the leverage to be very little, and this process also includes a lot of cash coming in the following quarters.

Recent Concerns and Management Outlook

In their earnings call for the last quarter, management is cautiously optimistic about the year 2024, and highlighted the need for cost savings in the face of a slowdown in the construction industry.

  • Inflation: Inflation continues to push up input costs and the company has been implementing ways to lower the impact to their profitability.
  • Supply Chain Disruptions: They are taking actions to solidify their supply chain, and also are diversifying the areas in which they have their sources.
  • Demand Slowdown: They expect demand to decline over the next year and they are trying to get ahead of that by focusing on cost cutting measures.
  • Acquisitions: They have completed several new acquisitions that are now being integrated and should help profitability going forward.

They have been trying to push through price increases in the recent period but haven’t been able to have the prices stick, which is why cost reductions and productivity improvements are going to be more important for the company going forward.

They have said that they are going to continue to invest in new business ventures that will create long-term value for the company, but in the short-term the company is focused on improving efficiencies in their present business.