It’s not as exciting as a tech stock, but Owens-Corning (OC, Financial) does provide cyclical return potential for investors, especially with the muted housing market expected to rebound once interest rates go lower again.
Despite the volatility that is part of its industry, the company's share price growth has averaged 10% per year since the company began trading publicly in 2008. In the short term, the stock is too volatile to be considered a bond substitute. But at some point, a value opportunity should appear if history repeats itself.
About the company
It was founded as a bottle-making company in the 1920s, but didn’t last in that industry for several reasons, including the arrival of prohibition and the Great Depression. So, the company began looking at glass and glass fibers differently.
Out of that came a 1935 agreement between Corning Glass Works and Owens Illinois to partner and follow up on their mutual interest in fiberglass. Numerous products came out of their partnership and merger in 1938). One of the most important of them was fiberglass insulation.
In 1980, the company designed one of America’s most iconic advertising symbols, with the pink panther as its brand image.
Today, the company has grown into a major construction materials supplier, with three main lines of business as shown in this chart:
As this price chart shows, Owens-Corning could almost be a proxy for the American construction industry:
Shareholder returns
In addition to capital gains, Owens-Corning shareholders also benefit from a dividend and share repurchases. It currently pays a dividend yield of 1.59% based on the May 19 closing price of $110.19. That’s close to the average dividend of 1.66% paid by companies in the S&P 500 in March 2023.
Share buybacks averaged 5.50% over the past five years, providing another boost to shareholder returns.
The following table shows Owens-Corning’s annualized and total returns:
GF Score and valuation
Overall, Owens-Corning has a high GF Score of 91 out of 100.
One of the weaker components of the fundamentals is the financial strength rank of 6 out of 10. For 2022, the debt-to-revenue ratio was 3.26, made up of long-term debt of $9.761 billion (it has no short-term debt) and revenue of $2.992 billion. The interest coverage ratio is a solid 14.46, while the Altman Z-Score is in the safe zone at 3.17.
Profitability ranks at 9 out of 10, with industry-leading margins and returns. The operating margin is 15.28%, the net margin is 13.54% and return on equity is 28.84%.
Growth contributes another 9 out of 10 rank. Over the past three years, revenue growth has averaged 15.40% per year, Ebitda has grown by an average of 29,20% and earnings per share without non-recurring items has expanded by an average of 51.10% per year.
Owens Corning’s GF Value rank is just 5 out of 10. However, several other valuation metrics see undervaluation, including discounted cash flow:
It’s also considered undervalued by the price-earnings ratio of 7.97 and the PEG ratio of 0.52.
A cyclical opportunity
I would argue that the most important characteristic of the Owens-Corning share price is its volatility. As the chart below shows, the price has had some wild swings over the past decade:
When the charts show these swings, a cyclical opportunity could be at hand. Timing the market may be anathema to some, but it can also be very profitable if done right.
Of course, waiting for a good price exposes investors to opportunity costs. In turn, that suggests a need to find alternate means of deploying one’s capital.
Two of the seven gurus who own the stock reduced their positions in the first quarter of 2023 according to 13F filings. The two gurus who sold also have the two biggest stakes. Chris Davis (Trades, Portfolio) of Davis Selected Advisors reduced his position by less than 1%, to finish the quarter with 3,603,881 shares. Jeremy Grantham (Trades, Portfolio) of GMO LLC owned 204,781 shares while Ken Fisher (Trades, Portfolio) of Fisher Asset Management held 178,059 shares as of the quarter's end.
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
Institutional investors held 71.42% of shares outstanding, while insiders owned 3.58%. The biggest holding among the insiders is that of Brian Chambers, the President and CEO, with 253,629 shares.
Wrapping up, I believe Owens-Corning stock offers relatively consistent total return potential for those who know how to play cyclical industries. It has good fundamentals and the long-term growth trend has been solid despite the volatility.
