Out of the Sick Bed and Still in the Pink: Insiders Love Owens Corning

By Michael Brush
Exclusively for InvestorIdeas.com
November 09 2006

Back in early October, insiders at wall board maker Eagle Materials (EXP) stepped up and bought shares in their company big time.

But I took a pass on writing about the stock for Insiders Corner – or buying it for my personal portfolio – because at the time there was so much anxiety about how demand for housing was falling through the floorboards.

Bad move.

Eagle has risen over 20% since then to trade at $40 from $33 or so where insiders bought.

I should have known that would happen. As a rule, when insiders place bets against a crowd whipped up by a frenzy of negative headlines, you make money betting with the insiders.

It hurts to miss a fairly obvious move like the big one-month gain in Eagle Materials. But it comes with territory when you are in the market. Besides, it’s the future that matters, not the past -- and now the market is giving us another chance.

Let’s take it.

A second chance

Another building supply company – Owens Corning (OC) – recently came public. The move saw a flurry of buying from a parade of insiders on Nov. 7. A dozen insiders, from chief executive David Brown to the vice president for siding solutions Brian Chambers, stepped up to buy more than $1.3 million worth of stock at $27.40.

It makes a lot of sense to join them, and here’s why.

Based in Toledo, OH, Owens Corning is a leading producer of residential and commercial building materials. Saddled with asbestos claims, the company went into bankruptcy in 2000. It came out and began trading a few days ago.

Owens Corning is no small-cap stock. It has a market cap of $1.5 billion. But from time to time we go outside the small cap realm of this column, when compelling insider signals arise. That’s the case here.

The company had net sales of $6.7 billion in the twelve months ending in September, during which time it had adjusted pro forma operating income of $561 million.

Owens Corning has a healthy amount of cash flow, plus lots of cash. The company has $1.5 billion in cash, or around $26.5 per share, which is near the recent share price of $27.75. True, it also has $3.2 billion in debt. But the stock trades for a paltry trailing price earnings ratio of 2.3. And it has a miniscule price to sales ratio of .22. Compare that to 2 and .75 for Eagle Materials and USG (USG), another company that makes wall board. Ok, they are not entirely comparable businesses, but the gap still seems too big.

Why is Owens Corning trading so low? Investors are concerned about weakness in the housing sector, of course. But they may be making a mistake, for two reasons.

First the Fed seems to be done raising interest rates, so the worst may be over for residential housing. I’m not saying the market will bounce back next quarter. There is still a lot of speculative buying to shake out. But the shock phase is probably behind us.

The National Association of Home Builders thinks 2007 housing starts will be 1.62 million, just below the seasonally-adjusted rate of 1.665 million for August. Yes, that’s down sharply from the two million seasonally-adjusted starts for August 2005. But it would represent a leveling off of sorts, compared to August of this year. Worries about a slowdown in the economy are probably overdone, as well, which we’ll get to in a moment.

More than just housing

Next, the company actually gets a lot of revenue outside of home construction, even though it may be best known for its pink insulation.

Owens Corning has a lot of moving parts. But to simplify things – and see how much revenue comes from hot areas like commercial construction – let’s break the company down into four categories.

Insulation

Owens Corning is North America’s largest insulation producer. It gets about a third of its sales from insulation. Sure, 60% of that is linked to new residential construction in the U.S. and Canada. That hurts. But 19% comes from commercial and industrial building in the U.S. and Canada – where growth is currently on fire.

And 13% comes from repair and remodeling. Ok, home refinancing isn’t what it used to be. But employment and income growth are solid, so not all remodeling projects are on hold. Besides, with energy prices so high, insulation projects are back in vogue.

Roofing and Asphalt

Owens Corning is one of the biggest makers of asphalt roofing shingles, a segment that provides roughly another third of revenue. Here, 67% of demand comes from repair and remodeling -- which has little to do with new construction trends. When you need a new roof, you need a new roof. (In case you were wondering, roofs on average need to be replaced every 19 years, says the company.) Another 12% of demand comes from the healthy commercial construction market. Only 21% comes from new residential construction.

Other building material

This chiefly means vinyl siding and fake veneered stones. Here, about half of demand comes from new residential construction, but 42% comes from repair and remodeling.

Composites

Owens Corning also makes glass fiber material put in composites used in automobiles, rail cars, shipping containers, refrigerated containers, trailers and commercial ships. This accounts for about a fourth of revenue. Most of the demand for these products has little to do with the housing market. Instead, it’s all about the economy. It should remain healthy because of:

• historically low interest rates


• a weak dollar which juices demand from abroad where economic growth is strong in many areas


• continued big deficit spending by the federal government.

About 40% of demand in the composites segment comes from outside the U.S. and Canada. The company thinks growth will continue at more than 5% a year.

To sum up, over half the demand for company products is linked to residential repair and remodeling and the healthy commercial construction market. About 36% comes from new residential construction in the U.S. and Canada.

And what about the asbestos liability? That’s a plus for investors, in a way. Thanks to Owens Corning’s contribution of as much as $3.5 billion to an asbestos trust, the company will get a break on taxes for several years.

The bottom line: All of this is not to say that it’s back to the races this quarter. It’s not. The company itself has guided for further weakness this quarter in many of its segments. But this is probably already priced in. And if, like me, you think many people are still underestimating the health of the economy, then investors are being too cautious in shunning Owens Corning. They are insulating themselves from economic weakness that won’t play out. The insiders seem to agree, which makes the stock a buy right here.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorI deas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp . InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.