A quarterly earnings beat hasn’t been enough to reverse the slide in Owens Corning (NYSE: OC) stock. In mid-morning trading the day after the maker of builder and construction materials delivered its second quarter earnings the stock is down just over 10% for the week.
Undoubtedly much of this is due to the sharp, market-wide sell-off to start the week. But is this a case of an oversold stock creating a buying opportunity or a red flag for an industry that is highly susceptible to recession pressures?
Why Revenue May Not Have Blown the Doors Off Expectations
Owens Corning delivered revenue of $2.79 billion. That missed analysts’ expectations of $2.92 billion. But it was higher than the $2.56 billion it reported in the same quarter in 2023.
However, this was the first quarter that Owens Corning realized revenue from its acquisition of Masonite, the manufacturer of “Doors That Do More.” Revenue from Doors accounted for net sales of $311 million. That’s statistically significant because without that revenue the company’s revenue would have been an even larger miss from analysts’ expectations as well aa a YOY miss.
On the one hand, this is like a pointless sports bar debate about what would have happened if something else hadn’t happened. The fact is the company did have those sales and that is likely to be a solid source of revenue and earnings moving forward. As confirmation of that, the company issued a forecast for net sales growth and EBITDA margin in the low 20-percent range for the coming quarter.
However, it’s also a data point that has to be looked at in context of the broader economy. Owens Corning is heavily reliant on a healthy market for new home construction as well as for remodeling activity.
Investors are Weighing the Company's Cautious Guidance
Looking forward, Owens Corning expects to see healthy demand for its non-discretionary items like roofing products and insulation in North America. However, it is projecting discretionary repair and remodeling activity (e.g. Doors) to remain soft in the near term.
This is similar to what investors have been hearing from other construction stocks this earnings season. That is, consumers are prioritizing must-have purchases (i.e. a leaky roof) over cosmetic remodels that they might otherwise do. Those concerns are being heightened when JPMorgan Chase & Co. (NYSE: JPM) CEO Jamie Dimon spoke of the likelihood of a h
The Fundamentals Speak to Solid Value
Owens Corning continues to execute a capital allocation strategy that focuses on delivering value to shareholders. In the quarter, the company generated $336 million of free cash flow and returned $52 million of that to shareholders via its dividend.
The company also prioritized paying down the debt it took on as a result of the Masonite acquisition and ended the quarter with a debt-to-adjusted EBITDA ration of 2.2x1 which is at the low end of its target range of 2x to 3x.
And the company’s forward P/E ratio of 9.8x is significantly lower than the average of companies in the Construction Materials sector.
History Suggests That This is Buyable Dip
This isn’t the first time that OC stock has had a sharp sell-off in the last 12 months. For example, from September 1 to October 23, 2023, Owens Corning stock dropped approximately 24% from peak to trough. And in 2024 there have been three separate drops between 8% and 12%. In each case, the stock has recovered to make higher highs.
When it comes to technical analysis, it’s important not to talk in absolute terms. However, it’s also important to follow obvious patterns. In this case, the trend suggests that this could be a buyable dip in OC stock.
And analysts continue to be generally bullish on OC stock since the earnings report. The Owens Corning analyst ratings on MarketBeat have a Moderate Buy rating on the stock with a consensus price target of $184.23. However, The Royal Bank of Canada (NYSE: RY) raised its price target from $211 to $213.
If you’re looking to trade OC stock, be aware that short interest spiked 11% in the last month. While the percentage of the stock being shorted remains very low, a spike like that suggests that many traders will keep pressure on the stock. That's reflected in the Options Chain for OC stock which is showing significantly more interest in Put options as a hedge with strike prices at $170 and $175.
