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Owens Corning (OC) Ails From High Costs, Strategic Moves Aid
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Owens Corning (OC - Free Report) has been witnessing supply-chain disruptions and significant inflation in material, energy and transportation. Also, it is witnessing negative foreign currency translation. Moreover, softness in housing market demand and residential repair and remodeling activity have been ailing the company since 2022. Owing to these headwinds, the company outlined tepid views for 2023 during the fourth-quarter 2022 earnings release.
Nevertheless, Owens Corning has implemented strategic initiatives to drive overall profitability. Also, bolt-on buyouts, product innovation and strength in the Insulation and Roofing businesses are added benefits.
Image Source: Zacks Investment Research
Let’s delve into the influencing factors of this leader in building materials systems and composite solutions.
Growth Driving Factors
Strong 2022 Result: Owens Corning reported impressive results for 2022. Adjusted earnings increased 39% and net sales rose 15% year over year. The uptick was mainly backed by the strength of the Insulation and Roofing businesses. Despite lower volumes, high costs and unfavorable currency, strong pricing helped the company generate higher earnings. Adjusted EBIT and adjusted EBITDA rose 25% and 19% on a year-over-year basis, respectively. Both adjusted EBIT and adjusted EBITDA margins expanded by 100 bps.
Strategic Initiatives to Drive Performance: Owens Corning has implemented strategic initiatives to drive overall performance. Segment-wise, in the Insulation business, technical and other building insulation businesses look strong on the back of geographic and product expansion through acquisitions. The company’s focus on network optimization and manufacturing performance drove earnings growth in this business. The company is on track to start its expanded insulation facility in Nephi, UT, by second-quarter 2023.
In Composites, the segment has been generating higher volumes, backed by its efforts on higher-value applications for glass non-wovens and specific markets like India. It is expanding or adding a new production line to its current facility in Fort Smith, AR.
In the Roofing segment, Owens Corning is leveraging vertical integration, material science capabilities and commercial strength to design as well as market unique roofing shingles and components that attract contractors, homeowners and distributors.
Expansion of Product Offerings: The company continues to invest in new insulation materials and systems for non-residential applications to expand its global product offerings. In 2022, the company launched 54 new or refreshed products across global businesses, a 13% increase from the prior year. These products span the core product platforms, including roofing shingles and components, insulation XPS foam and mineral wool, and wind, non-woven, and other composite materials.
Accretive Acquisitions: Acquisitions are vital to Owens Corning’s growth strategy. On Sep 1, 2022, it acquired the remaining 50% interest in its joint venture (JV) company — Fiberteq, LLC. This JV between Owens Corning and IKO Industries produces high-quality wet-formed fiberglass mats for roofing applications. The acquisition advances Composites strategy to focus on high-value material solutions and expands Owens Corning's capacity to produce non-woven mats.
Major Concerns
Lackluster Views: Owing to the above-mentioned headwinds, the company expects volumes to decline in first-quarter 2023 in many of the end markets and product categories as its customers continue to have a more cautious view on their ordering patterns. Also, modest currency headwinds in the Insulation and Composites businesses, as well as divestitures related impacts, will hurt the first quarter’s performance. For the first quarter, it expects a moderate decline in net sales from the prior-year period and EBIT margins in the low- to mid-teens. In first-quarter 2022, the adjusted EBIT margin was 18%.
Segment-wise, Composites’ revenues are likely to be down significantly from the previous year as well as sequentially, thanks to lower volumes, currency woes, unfavorable impacts from the exit of the DUCS product line and the sale of the Russian operations. In Roofing, OC anticipates relatively flat revenues owing to low ARMA market shipments in the high single digits as distributor inventory levels continue to reset based on regional demand trends and improved product availability. Asphalt costs are expected to increase from the December 2022 low due to the paving season.
High Costs: OC is witnessing supply chain disruptions and significant inflation in material, energy and transportation costs. This apart, it has been facing labor constraints. This is dampening Owens Corning’s operating performance. In 2022, all three businesses witnessed higher input and transportation cost inflation. At 2022-end, cost of sales grew 13.8% year over year, thanks to input cost inflation, increased transportation costs, lower volumes and other manufacturing costs.
Currency Woes: OC is exposed to risks from unfavorable movements in foreign currencies due to its operations in Europe and Asia-Pacific. In 2022, Composites and Insulation’s net sales growth was affected by unfavorable impact of foreign currencies translation into the United States. The company expects its first-quarter 2023 performance to witness a sequentially similar currency headwind.
Zacks Rank & Key Picks
Owens Corning currently carries a Zacks Rank #3 (Hold).
Frontdoor, Inc. (FTDR - Free Report) : Based in Memphis, TN, Frontdoor provides home service plans across the United States. Higher renewal and direct-to-consumer revenues have been aiding the company’s performance. Frontdoor’s long-term vision, its focus on digital-first services, and its efforts to drive demand growth, raise customer retention and tackle the pandemic-driven inflationary pressures by lifting prices dynamically and leveraging scale to mitigate short-term challenges are expected to drive growth.
Installed Building Products, Inc. (IBP - Free Report) : The company is a leading installer of insulation and complementary building products. It primarily banks on a robust pipeline of acquisition opportunities across multiple geographies, products and end markets.
Installed Building’s earnings for 2023 are expected to decline 6%. It currently sports a Zacks Rank #1.
Simpson Manufacturing Co., Inc. (SSD - Free Report) : The company designs, engineers and manufactures high-quality wood and concrete building construction products designed to make structures safer and more secure that perform at high levels. It has been benefiting from product price increases and key growth initiatives.
Simpson’s earnings for 2023 are expected to decrease by 16.8%. It currently sports a Zacks Rank #1.
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Owens Corning (OC) Ails From High Costs, Strategic Moves Aid
Owens Corning (OC - Free Report) has been witnessing supply-chain disruptions and significant inflation in material, energy and transportation. Also, it is witnessing negative foreign currency translation. Moreover, softness in housing market demand and residential repair and remodeling activity have been ailing the company since 2022. Owing to these headwinds, the company outlined tepid views for 2023 during the fourth-quarter 2022 earnings release.
Shares of the company have underperformed the Zacks Building Products - Miscellaneous industry in the past three months.
Nevertheless, Owens Corning has implemented strategic initiatives to drive overall profitability. Also, bolt-on buyouts, product innovation and strength in the Insulation and Roofing businesses are added benefits.
Image Source: Zacks Investment Research
Let’s delve into the influencing factors of this leader in building materials systems and composite solutions.
Growth Driving Factors
Strong 2022 Result: Owens Corning reported impressive results for 2022. Adjusted earnings increased 39% and net sales rose 15% year over year. The uptick was mainly backed by the strength of the Insulation and Roofing businesses. Despite lower volumes, high costs and unfavorable currency, strong pricing helped the company generate higher earnings. Adjusted EBIT and adjusted EBITDA rose 25% and 19% on a year-over-year basis, respectively. Both adjusted EBIT and adjusted EBITDA margins expanded by 100 bps.
Strategic Initiatives to Drive Performance: Owens Corning has implemented strategic initiatives to drive overall performance. Segment-wise, in the Insulation business, technical and other building insulation businesses look strong on the back of geographic and product expansion through acquisitions. The company’s focus on network optimization and manufacturing performance drove earnings growth in this business. The company is on track to start its expanded insulation facility in Nephi, UT, by second-quarter 2023.
In Composites, the segment has been generating higher volumes, backed by its efforts on higher-value applications for glass non-wovens and specific markets like India. It is expanding or adding a new production line to its current facility in Fort Smith, AR.
In the Roofing segment, Owens Corning is leveraging vertical integration, material science capabilities and commercial strength to design as well as market unique roofing shingles and components that attract contractors, homeowners and distributors.
Expansion of Product Offerings: The company continues to invest in new insulation materials and systems for non-residential applications to expand its global product offerings. In 2022, the company launched 54 new or refreshed products across global businesses, a 13% increase from the prior year. These products span the core product platforms, including roofing shingles and components, insulation XPS foam and mineral wool, and wind, non-woven, and other composite materials.
Accretive Acquisitions: Acquisitions are vital to Owens Corning’s growth strategy. On Sep 1, 2022, it acquired the remaining 50% interest in its joint venture (JV) company — Fiberteq, LLC. This JV between Owens Corning and IKO Industries produces high-quality wet-formed fiberglass mats for roofing applications. The acquisition advances Composites strategy to focus on high-value material solutions and expands Owens Corning's capacity to produce non-woven mats.
Major Concerns
Lackluster Views: Owing to the above-mentioned headwinds, the company expects volumes to decline in first-quarter 2023 in many of the end markets and product categories as its customers continue to have a more cautious view on their ordering patterns. Also, modest currency headwinds in the Insulation and Composites businesses, as well as divestitures related impacts, will hurt the first quarter’s performance. For the first quarter, it expects a moderate decline in net sales from the prior-year period and EBIT margins in the low- to mid-teens. In first-quarter 2022, the adjusted EBIT margin was 18%.
Segment-wise, Composites’ revenues are likely to be down significantly from the previous year as well as sequentially, thanks to lower volumes, currency woes, unfavorable impacts from the exit of the DUCS product line and the sale of the Russian operations. In Roofing, OC anticipates relatively flat revenues owing to low ARMA market shipments in the high single digits as distributor inventory levels continue to reset based on regional demand trends and improved product availability. Asphalt costs are expected to increase from the December 2022 low due to the paving season.
High Costs: OC is witnessing supply chain disruptions and significant inflation in material, energy and transportation costs. This apart, it has been facing labor constraints. This is dampening Owens Corning’s operating performance. In 2022, all three businesses witnessed higher input and transportation cost inflation. At 2022-end, cost of sales grew 13.8% year over year, thanks to input cost inflation, increased transportation costs, lower volumes and other manufacturing costs.
Currency Woes: OC is exposed to risks from unfavorable movements in foreign currencies due to its operations in Europe and Asia-Pacific. In 2022, Composites and Insulation’s net sales growth was affected by unfavorable impact of foreign currencies translation into the United States. The company expects its first-quarter 2023 performance to witness a sequentially similar currency headwind.
Zacks Rank & Key Picks
Owens Corning currently carries a Zacks Rank #3 (Hold).
Frontdoor, Inc. (FTDR - Free Report) : Based in Memphis, TN, Frontdoor provides home service plans across the United States. Higher renewal and direct-to-consumer revenues have been aiding the company’s performance. Frontdoor’s long-term vision, its focus on digital-first services, and its efforts to drive demand growth, raise customer retention and tackle the pandemic-driven inflationary pressures by lifting prices dynamically and leveraging scale to mitigate short-term challenges are expected to drive growth.
Frontdoor’s earnings are expected to grow 2.4% in 2023. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Installed Building Products, Inc. (IBP - Free Report) : The company is a leading installer of insulation and complementary building products. It primarily banks on a robust pipeline of acquisition opportunities across multiple geographies, products and end markets.
Installed Building’s earnings for 2023 are expected to decline 6%. It currently sports a Zacks Rank #1.
Simpson Manufacturing Co., Inc. (SSD - Free Report) : The company designs, engineers and manufactures high-quality wood and concrete building construction products designed to make structures safer and more secure that perform at high levels. It has been benefiting from product price increases and key growth initiatives.
Simpson’s earnings for 2023 are expected to decrease by 16.8%. It currently sports a Zacks Rank #1.