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Strategic Initiatives Drive Owens Corning Despite High Costs

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Owens Corning (OC - Free Report) is poised to benefit from acquisitions and expansion initiatives. Moreover, improved operating efficiencies, and higher contribution from Roofing and Composites segments added to the upside.

Notably, shares of Owens Corning have gained 27.5% in the past six months compared with the Zacks Building Products - Miscellaneous industry’s 17.1% rise.

 

                        
However, higher raw material costs and currency fluctuation are potential headwinds. Also, lower volume in the North America residential fiberglass insulation business raises concerns.

Let’s discuss the factors that substantiate the company’s Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Growth Catalysts

Owens Corning has been displaying significant strength on geographic and product expansion. Also, strategic initiatives —including automation and additional investments— and reducing costs bode well.

Notably, the company generated 7% higher volume year over year in the Composites segment on strategic supply agreements, large-scale furnace investments and additional productivity.

Moreover, acquisition is an important part of Owens Corning’s growth strategy. In February 2018, it acquired Paroc, which enabled it to expand geographic reach in Europe and augment portfolio to include insulation products in all three major markets — North America, Europe and China. In the last three quarters of 2019, the acquisition added $38 million to total net sales.

Although Material and transportation inflations have been affecting the company, solid pricing momentum are somewhat mitigating the same.

Concerns

Material and transportation costs are dampening Owens Corning’s operating performance. Also, higher rebuild and start-up costs have been negatively impacting its results. The ongoing volatility in material costs, which may also persist in the near term, might affect the company’s performance.

Also, lower volumes in the North America residential fiberglass insulation business and negative foreign currency translation pose concerns. Notably, the Insulation segment witnessed a 2% year-over-year sales decline and a fall of 100 basis points in EBIT margin due to soft demand, mainly in the North America residential fiberglass insulation business, and currency headwinds.

Key Picks

Some better-ranked stocks in the same space are Foundation Building Materials, Inc (FBM - Free Report) , Installed Building Products, Inc (IBP - Free Report) and Simpson Manufacturing Co., Inc (SSD - Free Report) , each currently sporting a Zacks Rank #1.

Foundation Building Materials surpassed earnings estimates in each of the trailing four quarters, delivering a positive surprise of 45.1%, on average.

Installed Building Products has expected earnings per share growth rate of 16% for three-five years.

Simpson Manufacturing’s 2020 earnings are expected to rise 19.2%.

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