Credit Suisse Initiates Owens Corning At Underperform, Expects Roofing Demand To Be 'Modest'

Credit Suisse started coverage of Owens Corning OC with an Underperform rating and $51 price target on challenging roofing growth.

Owens Corning is a global manufacturer of composite and building materials systems with 2015 net sales of $5.4 billion.

"[W]e believe that re-roof demand will be challenged for far longer than investors expect owing to the extended replacement cycle, with this year's strong volumes likely pulling forward from future years," analyst Matthew Bouley wrote in a note.

Moreover, the analyst expects that modest underlying demand remains a long-term pressure on pricing.

Bouley expects growth in re-roof demand (75 percent of volume) to remain roughly flat for the next decade due to the rise of longer-life laminated shingles, while roofing margins are expected to be pressured by falling shingle prices and the gradual rise in asphalt prices.

For Insulation, the analyst sees fading pricing resulting from OC's competitive share loss is a risk to guidance for flat margins in 2016 with carry-over to 2017. In addition, Bouley said slowing global IP is a risk to both demand and price for Composites.

"We forecast OC's revenue growth to be the lowest in our building products coverage through 2017, while inherent volatility in demand (particularly Roofing) lends risk to margins, free cash flow, and sentiment," Bouley highlighted.

The analyst projects 2016 EPS/ revenue of $3.37/$5.6 billion versus Street's mean of $3.44/$5.6 billion. For 2017, Bouley expects EPS/revenue of $3.69/$5.8 billion compared to Street estimate of $3.72/$5.9 billion.

Shares of Owens Corning closed Wednesday at $54.19. Bouley's $51 target price represents 7.5x his '17 EBITDA estimate of $1.08 billion.