Friday, January 26, 2007

Owens Corning- Thinking Pink Will Stuff Your Wallet With Green

Owens Corning is another company that recently emerged from the desolate wasteland of asbestos bankruptcy. OC (not the TV show) emerged in Nov. 2006 and its shares, after an initial run have settled around $28-$30 a share. I believe this is a mere pittance of their true value.

Disclosure: I currently hold OC warrants on 1000 shares. These warrants allow me to purchase 1000 shares of OC at $45 a share at any time in the next 7 years.

Why is OC trading so cheap? Let's look at it.

Housing Market: When most of us think of OC, we only think of home insulation (we "think pink" as their commercials tell us). Let's look at how this slowdown in new construction will effect OC.

Insulation: (30% of total revenue) OC is the world leader in both commercial and residential construction, BUT only 60% of this segments earnings come from new construction. The rest is from repair and international sales.

Asphalt roofing: (28% of total revenue) Only 21% of this segments sales are from new residential construction. The rest is commercial as residential repair.

While these segments will be affected by the new construction slowdown, the market is pricing this effect to be absolute rather the smaller effect it will be. Let's not forget, the repair business should see no slowdown, if you need a new roof, you need a new roof, there is no putting it off. Also, tax changes (Energy Policy Act of 2005) have assured a market for insulation upgrades in existing homes.

Analyst Coverage: Currently coverage of OC is non existent. This has the effect of keeping it out of the news and off potential investors radar screens. The only time we do hear about it is in an asbestos article and in relation to the housing slowdown, neither of which will make people want to purchase shares. When a curious potential investor cannot even find an earnings estimate for the company, it scares them away.

Bankruptcy Comparisons: If you pull up OC on any of the major finance websites to get info on it, you will most likely decide it is not a good investment. The results they give for OC include bankruptcy items. You need to be able to pull these charges out of the numbers to see how the actual businesses of OC were performing. This is very laborious and most people will not bother or simply do not understand that these charges are now eliminated. The actual business of OC has always been very profitable, it shows huge accounting losses due to asbestos write offs, now that these are gone, paper profits will resume.

These factors are all depressing the stock of OC. However, if we dig we find that the perception of the limited scope of their business is wrong and the companies various segments are performing extremely well. So, when we have a good company with a temporarily depressed stock price due to conditions not totally related to its underlying business performance what do we have? A value play!

Let's find out what the other's seem to be missing:

Building Materials Business: (19% of total revenue) Through a series of acquisitions, OC is N. America's leading supplier of exterior siding and exterior/ interior stone (think patio's and interior stone walls) for both residential and commercial construction. Only 55% of this segments business is from new residential building. Included in this business is the OC Basement Refinishing franchise. Both these these segments were added during the bankruptcy process so its results are "hidden" when one does a cursory look at OC's eps the past 3 years due to massive asbestos write offs.

Composites: (23% of total revenues) Here is the hidden gem and a double digit grower. OC's composites are used in everything from boats, planes, military Hummers, RV's, high speed trains, the auto industry and more. OC is the world's number one producer of this stuff. The fastest growing sector? Composites for wind turbines (growing 15%-20% annually). I would bet painfully few potential investors are even aware this housing proof segment not only exists in OC, but is the fastest growing division!!

I will do the work for you on earnings (minus bankruptcy charges). They have grown from 300 million in 2002 to 550 million in 2005 and look to go to 600 million in 2006 (that is a cool 100% growth in 4 years). Now take the roughly 130 million shares outstanding and you get $4.61 a share in earnings (although this is the only actual earnings estimate you will be able to find) for a current PE of 6.2!! No wonder the CEO and Chairman of The Board recently ponied up 1/2 a million of their own dollars each to buy shares in the open market (various other insiders have purchased another $700,000 worth)!

Let's take this one additional step. Let pretend we had the money to buy all of OC. What would we get? For our $29 a share price we would receive the $12 a share in cash OC currently has, plus another $4.60 a share in earnings during the first year. So let's get this straight, for $29 a share we would get $16.60 (57% return in year one) back immediately and this does not even include the value of its assets or earnings past the first year!!

They call it value investing for a reason..........


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