Owens Corning (NYSE:OC) reported disappointing Q2 results that showed continued weakness in the roofing business but continued year-over-year improvement in both insulation and composites. While the insulation and composites business results were in line with the company's expectations in Q2, the roofing business underperformed the market again in Q2. Consolidated revenue in the quarter was $1.36B, flat Y/Y. The $96M adjusted EBIT for the quarter was down sharply from $124M last year. Adjusted earnings were $45M, or $0.38 per share, down from $68M a year ago or $0.56 per share. GAAP net earnings reached $21M or $0.18 per share compared to $49M or $0.41 per share.
For the second half of 2014, the OC's roofing business is expected to stop under-performing and start moving in line with the market, which could still mean more weakness. However, as I stated in my latest thesis, "the company has a history of missing its own estimates: For example, in addition to the current Q1 miss, the company missed as recently as during the third quarter of 2013." Also, I mentioned that "the current woes for Owens Corning could continue. My worries are not as much company-specific as they are signaling broader concerns regarding the pace of growth rates and other developments in the current housing recovery." Therefore, the risks remain for another possible quarter of under-performing roofing sales, which would signal that OC could have deeper problems with competitiveness in this segment as opposed to just being a victim of general weakening housing industry trends. Speaking of the U.S. housing numbers, they continued to be surprisingly weak, which is in line with my expectation, so I am watching OC closely.
I reiterate my price target of $37.6 per share on Owens Corning as the current roofing business weakness is placed into the price, providing that the housing industry trends don't turn more negative or prolonged. With the recent share-price drop, I now see a ~6% upside within 12 months, comparative to the full valuation that I cited in my latest thesis.
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