Owens Corning: Investor Day Highlights The Path Toward A Higher Growth, Less Cyclical Profile

Summary

• Owens Corning outlined a clear path toward achieving its sustainability and innovation goals at its recent investor day.
• The updated medium-term financial targets also embed some conservatism, leaving room for an upside surprise ahead.
• With shares trading lower following the investor day, I would accumulate on the dip.

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Owens Corning (NYSE:OC), a diversified building products company involved in the manufacture of fiberglass composites, insulation, and roofing shingles, recently hosted its first Investor Day in several years. On balance, investors should come away from the presentations with a greater appreciation for the company's path toward achieving sustainability and innovation while also driving increased consistency through the cycles. While OC shares underperformed post-event, likely driven by its c. $10 billion medium-term revenue and 14-18% EBIT margin targets, I suspect the fiscal 2024 outlook embeds a fair bit of conservatism as OC migrates toward more prefabricated and multi-material solutions. With key OC customers like Beacon Roofing Supply (BECN), Installed Building Products (IBP), and TopBuild (BLD) also trading at considerable premiums to OC, I see plenty of room for a narrowing valuation gap over time.

Conservative Medium Term Guidance Signals Upside Ahead

Notably, management guided to c. $10 billion of top-line and EBIT generation of $1.4-1.8 billion in fiscal 2024 (including M&A contribution of c. $800 million and proceeds from the DUCS divestiture of c. $270 million). The projected revenue CAGR of c. 6% (half organic, half M&A) is broad-based, with growth coming from all three segments on the back of higher MMS ("multi materials solutions") penetration and prefab in the later years. While the headline numbers were largely in-line, I view the organic growth outlook as slightly too conservative in light of the strength of the residential and non-residential cycles, along with the higher growth rate globally in insulation.

Source: Owens Corning Investor Day Presentation Slides

The main talking point, however, was the updated margin outlook, which will give skeptics fodder that OC's recent margin performance is unsustainable. While the midpoint of OC's EBIT margin guide of 14-18% does imply flat margins from fiscal 2021, I think the upper end is well within reach in the current demand environment. At the segment level, OC's latest guidance also calls for mid-teen % margins for insulation and composites, while roofing margins are higher at 20%, with the upside/downside scenario bracketing the longer-term targets by a few %pts. More importantly, OC management also signaled its margin trajectory would be less volatile this time around, even if there is an air pocket in demand. Finally, with permanent cost takeout also successfully implemented, most notably in insulation where half of the 500bps gain is expected to stick post-pandemic, there remains plenty of room for an upside surprise on the margin front.

Source: Owens Corning Investor Day Presentation Slides

Moving Towards a Larger TAM and Reducing Cyclicality

The strategy to creating a less cyclical OC is underpinned by a continuing pivot toward higher value and innovative products, with a successful transition guided to vastly expand its addressable market to c. $200 billion (up from c. $40 billion currently). OC also plans to diversify away from more cyclical end markets - although it will maintain a presence in these markets, it will broaden its exposure to gain growth avenues and dampen overall cyclicality. This will be achieved through a balance of organic investment and innovation, as well as M&A, with multi-material offerings and prefabricated solutions (e.g., wall panels or complete roofing systems) likely to be the key focus.

Source: Owens Corning Investor Day Presentation Slides

On another positive note, sustainability is also set to be crucial to the buildout of its new products, with recycled fiberglass insulation and composite materials for larger-scale wind turbines representing potential growth areas. To achieve this, OC is ramping up R&D spending by c. 15% with a focus on developing multi-material solutions and products for prefabricated construction. And in the medium-term, the adoption of IECC 21 codes is also set to add up to 270 million lbs/year of additional insulation demand, while the EU Green Bill should lead to c. 35 million buildings being renovated by fiscal 2030. All in all, this should allow OC an extensive runway to continue outgrowing the broader construction market (while also pursuing a net-zero agenda) in the upcoming years.

Improved Cash Generation Underpins Capital Allocation Update

Encouragingly, OC is targeting FCF conversion of 100+% in the medium-term and shareholder return of c. 50% of FCF over time despite near-term headwinds such as a normalization of the cash tax rate and rebuilding inventories. The key driver is OC's improved capital efficiency and disciplined working capital management policies - the company now sees capital expenditures running at 4-5% of sales on the back of initiatives such as improved asset maintenance, furnace life extensions, along with less capital-intensive future acquisitions and the development of higher-value solutions.

Source: Owens Corning Investor Day Presentation Slides

The balance sheet outlook also appears strong - OC is targeting a 2-3x leverage ratio as it looks to pursue acquisitions to support the expansion of its total addressable market opportunities. Also worth noting is the undemanding M&A assumptions underlying the $10 billion revenue target and the resulting optionality - any excess cash is free to be deployed toward further enhancing its revenue base or to meaningfully reduce the share count going forward.

Final Take

Overall, OC's investor day was upbeat and highlighted the favorable progress the company has posted in recent years, providing a foundation for a bright longer-term outlook. In particular, the strong end-market backdrop, expansion of key addressable markets, along with the solid margin levels OC has maintained this year were key highlights. And with the company proving it can materially improve profitability through its innovation and process expertise, OC appears on track to generate consistent results even in less friendly operating environments ahead. At present, shares trade at an undemanding EV/EBITDA multiple of c. 6x (towards the lower end of the historical range), which seems unwarranted considering the earnings growth potential. Looking ahead, expect the widening valuation premium to key public customers such as BECN, IBP, and BLD to narrow as OC continues to prove out the investment case over time.

Data by YCharts

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.