Energy Efficient Building Demand May Drive Solid Yet Balanced Returns Ahead

Catalysts

About Owens Corning

Owens Corning is a global manufacturer of building and construction materials, including roofing, insulation and doors.

What are the underlying business or industry changes driving this perspective?

• Long term demand for energy efficient building envelopes in North America and Europe may support higher insulation and roofing volumes. However, ongoing cost inflation and required production curtailments could cap pricing power and compress EBITDA margins over the next several years.
• Elevated capital spending on new roofing and insulation capacity, including laminate shingle and XPS foam plants, is expected to lift productivity. At the same time, there is a risk that housing and repair and remodel activity recover more slowly, which may delay utilization ramp and weigh on return on capital and free cash flow.
• Nonresidential investment in data centers, manufacturing and energy projects may create incremental insulation and roofing demand. Continued project delays in the U.S. and Mexico, however, could prolong weaker volumes and limit revenue growth visibility.
• The Doors segment has clear synergy and cost saving opportunities. Even so, sustained weakness in new construction and discretionary remodel, combined with tariff driven inflation, may hinder planned margin expansion and keep segment EBITDA margins near current levels.
• The divestiture of the glass reinforcements business and portfolio focus on building products should simplify operations. Persistent macro uncertainty and more cautious distributor inventory management, however, could restrain top line growth and slow progress toward enterprise EBITDA margin targets.

Assumptions

This narrative explores a more pessimistic perspective on Owens Corning compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Owens Corning's revenue will decrease by 6.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.7% today to 18.8% in 3 years time.
• The bearish analysts expect earnings to reach $1.8 billion (and earnings per share of $20.15) by about December 2028, up from $-80.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.1 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.0x on those 2028 earnings, up from -118.2x today. This future PE is lower than the current PE for the US Building industry at 20.2x.
• The bearish analysts expect the number of shares outstanding to decline by 3.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.92%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Long-term secular tailwinds in North American and European building products, including improving housing affordability as mortgage rates fall and increasing nonresidential investments in data centers, manufacturing and energy, could drive higher than expected demand and push revenue and earnings materially above current run rate levels over the next several years.
• Strategic capacity expansions such as the new laminate shingle line in Medina, the planned high capacity roofing plant in Alabama and new low cost XPS and fiberglass lines may translate into stronger productivity, operating leverage and structurally higher EBITDA margins once volumes recover. This could support sustained margin expansion and earnings growth.
• The integration of the Doors business, with identified cost synergies of $125 million and an additional $75 million of structural cost savings, combined with expanding dealer and retail programs, may unlock faster than expected margin improvement and profit growth in a segment currently depressed by cyclical weakness.
• Disciplined capital allocation, elevated but high return capital projects, and a strong balance sheet with debt to EBITDA near the low end of the target range could enhance free cash flow compounding and return on capital. This may support higher cash generation and potentially a re rating of the equity.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Owens Corning is $110.0, which represents up to two standard deviations below the consensus price target of $140.56. This valuation is based on what can be assumed as the expectations of Owens Corning's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $179.0, and the most bearish reporting a price target of just $110.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $9.5 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of $115.01, the analyst price target of $110.0 is 4.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.