Insulation Momentum Is Already Priced Into Owens Corning, Goldman Sachs Says In Downgrade

Since the shares of Owens Corning OC were added to Goldman Sachs' conviction list Feb. 17, 2017, they have jumped 41 percent versus the S&P 500's 11.4-percent gain over the same time frame. 

The Analyst 

Analyst Samuel Eisner downgraded Owens Corning from Buy to Neutral and lowered the price target from $94 to $90.

The Thesis

Although Owens Corning could see upside to EBIT from insulation pricing, the theme is already well-known and reflected in the shares, Eisner said in a Wednesday note.

The acquisitions of Paroc and Pittsburgh Corning expanded Owens Corning's geographic reach, thermal exposure and end markets, the analyst said. 

The consensus EBIT estimate for the segment has increased 58 percent since January 2017, Eisner said, but the analyst is less positive on upward surprises to 2018 EBIT due to other factors such as inflation.

The roofing segment's margins are likely to be 20 percent despite historically weak pricing across the asphalt shingle industry, Eisner said. Despite an aggressive price compression estimate for 2019 and 2020 — given that 51 percent of distribution is controlled by three large players — Goldman Sachs still estimates a 19.7-percent average margin through 2020.

Alpha is likely to come from multiple expansion, Eisner said. Owens Corning needs to execute on integration and ride out some cyclical volatility before the market assigns a higher multiple, he said. 

The Price Action

Owens Corning shares were up about 33 percent over the past year through Tuesday.

The stock was down 0.62 percent at the time of publication Wednesday afternoon. 

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Photo courtesy of Owens Corning.