Phased Investments Will Improve Roofing, Insulation And Door Integration

Key Takeaways

• Strategic divestitures and investments focus on high-potential markets and enhanced capabilities, aiming to streamline operations and drive revenue growth.
  
• Synergies from integrating the Doors business and mitigating tariff impacts enhance margins, supporting stability and future growth.
  
• Owens Corning faces pressure on margins and revenue growth due to potential overcapacity, rising costs, tariffs, raw material volatility, and weak housing demand.

Catalysts

Provides residential and commercial building products in the United States, Europe, the Asia Pacific, and internationally.

• Owens Corning is making phased investments in their Roofing and Insulation businesses, expected to add capacity and network flexibility, potentially increasing revenues and improving cost positions over the next three years.
  
• The integration of the Doors business is on track to exceed $125 million in cost synergies, which should enhance net margins and position the company for future growth.
  
• The company is executing strategic divestitures in China and Korea, focusing operations on geographies and applications with higher potential for market leadership, which could streamline operations and improve earnings.
  
• Owens Corning is undertaking long-term organic investments to boost market-leading positions, such as new laminate shingle production and expanding insulation capabilities, which should drive revenue growth and maintain EBITDA margins above 20%.
  
• Future tariff impacts are being mitigated through supply chain adjustments, potentially minimizing cost risks and stabilizing net margins in the face of uncertain global economic conditions.

Owens Corning Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Owens Corning's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 13.4% in 3 years time.
• Analysts expect earnings to reach $1.5 billion (and earnings per share of $18.18) by about May 2028, up from $647.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, down from 18.9x today. This future PE is lower than the current PE for the US Building industry at 19.9x.
• Analysts expect the number of shares outstanding to decline by 1.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.65%, as per the Simply Wall St company report.

Owens Corning Future Earnings Per Share Growth

Risks

• Owens Corning's growth investments in new insulation and roofing production lines could lead to overcapacity in the market if housing starts, especially single-family homes, remain slow, potentially impacting revenues and margins.
  
• Rising manufacturing costs, particularly the need for maintenance and investments, could pressure net margins, as the company indicated higher manufacturing costs and anticipated cost inflation in their operations.
  
• Tariffs, particularly on products being moved across North American borders, are projected to impact cost of goods sold by 1% to 2% in the latter part of 2025. This tariff uncertainty could strain net margins if not fully offset by mitigation efforts.
  
• Potential volatility in the costs of raw materials, particularly asphalt in the roofing segment, due to the disconnect from WTI oil prices, could impact the company's ability to manage input costs effectively, affecting net margins.
  
• Weakness in new residential construction and repair/remodel markets in North America and Europe, due to elevated interest rates and consumer cautiousness, could suppress demand, impacting revenue growth expectations.

Valuation

• The analysts have a consensus price target of $181.491 for Owens Corning based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $235.0, and the most bearish reporting a price target of just $155.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $11.4 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $142.63, the analyst price target of $181.49 is 21.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.