Owens Corning Stock: Undervalued With Big Long-Term Potential (NYSE:OC)

Tech stocks have had a decent rally to start the year, and while it’s easy to be a market hero and proclaim that the downturn is over, plenty of questions remain around valuation and headwinds for growth names. That’s why it may pay to stick with “old economy” stocks that produce tangible goods, and which are unlikely to be disrupted anytime soon.

This brings me to Owens Corning (NYSE:OC), which falls outside the radar for many investors. However, its unassuming nature and durable business model is what makes it a potentially great stock to own. In this article, I highlight why OC at the current price presents an excellent opportunity for long-term dividend growth investors.

Why OC?

Owens Corning is a global building and construction materials leader, and operates with the three business segments of composites, insulation, and roofing. It’s based in Toledo, Ohio and was founded back in 1938. Today, it has 20,000 employees and has a presence in 33 countries.

OC has demonstrated a fairly straightforward revenue growth trajectory, and is demonstrating strong operating leverage through increasing margins. As shown below, OC has nearly doubled its revenue over the past 10 years to $9.6 billion over the trailing 12 months, and has grown its operating margin to 18% over the same timeframe.

OC has a significant market share in the US, one of the largest construction markets in the world. This allows Owens Corning to efficiently distribute its products to a wide range of customers and provides a solid base for the company’s operations and growth. OC’s efficient scale has translated into high profitability for the company. As shown below, OC scores an A profitability grade, with EBITDA and Net Income margins of 24% and 14%, respectively, sitting well ahead of the sector median.

Meanwhile, OC is doing well despite a high interest rate environment. This is reflected by net sales growing by 14% YoY to $2.5 billion during the third quarter. This was driven by growth across the board, with roofing and insulation sales seeing double digit growth of 15% and 18%, and composite sales growing by 8%.

Looking forward, OC has been expanding its international footprint, particularly in emerging markets such as Asia and Latin America, to capitalize on the growth opportunities in these regions. It’s also focusing on developing new products and solutions to meet the changing needs of its customers, such as sustainable insulation and roofing solutions.

Management has recently accelerated these efforts, with the launch of 15 new or refreshed products in the last reported quarter alone. Moreover, OC isn’t just paying lip service to sustainability, as its efforts have been widely recognized by customers as a key differentiators, as noted by management during the last conference call:

Increasingly, our sustainability performance is recognized as an important differentiator by our customers. Earlier this month, Lowe’s (LOW) honored Owens Corning by naming us their 2022 Sustainability Partner of the Year, based on our commitment to reducing our environmental impact and building a sustainable future through material innovation. In delivering the award, Lowe’s cited our company as a critical partner in the progress it has made on its sustainability goals, including increasing the number of eco products provided to customers and reducing emissions across its entire value chain.

Importantly, OC maintains a BBB rated balance sheet. It also recently bumped up its quarterly dividend this month by 49%, from $0.35 previously to $0.52, resulting in a 2.3% yield at the current price. Its dividend is well-protected by a very low 11% payout ratio. As such, there is plenty of room for further increases down the line. Plus, management also prioritizes share buybacks as another form of capital return, including $206 million worth of buybacks in the first nine months of 2022. As shown below, OC has retired 12% of its outstanding float over the past 5 years alone.

Finally, I see value in OC at the current price of $89.71 with a forward PE of 7.1, sitting well below its normal PE of 15.2 over the past decade. Analysts are baking in a downturn for the company this year, but even with an expected 17% decline in EPS, OC would still have a low forward PE of just 8.6, meaning that share buybacks would still drive an 11.6% earnings yield. Analysts have a consensus Buy rating on the stock with a conservative price target of $100, which still implies a potential one-year total return in the low-teens.

Investor Takeaway

Owens Corning is a well-established business with a long history of profitability and solid capital returns. It has an efficient scale and healthy balance sheet, allowing it to grow its operations while still providing generous capital returns to shareholders.

Plus, OC’s focus on sustainability through innovative products should continue to differentiate it from its peers. Finally, with strong capital returns and low forward PE ratio, OC offers a compelling risk/reward at the current price for potentially strong total returns.