According to a 13G filed with the SEC, Blue Ridge Capital has acquired a total of 6.7 million shares of Owens Corning (NYSE:OC). Owens Corning is a $3.9 billion market cap materials company which provides composites and building materials such as glass fiber. Blue Ridge, managed by Tiger Cub John Griffin (Griffin, in fact, was Julian Robertson’s second in command at Tiger Management before launching Blue Ridge in 1996), had initiated a position in the stock during the second quarter and owned 2.6 million shares at the end of June. Find more stock picks from Blue Ridge Capital.
In theory, Owens Corning should be able to benefit from a continued upturn in the housing market (as well as in general from higher construction activity). However, during the second quarter, sales actually came in 4% lower than in the second quarter of 2011. With operating expenses actually up slightly, earnings were cut in half. With the company taking losses in the first quarter of 2012, the first half of the year has actually generated 6 cents per share of losses compared to 81 cents per share of earnings in the same period in the previous year. Cash flow from operations for the first half of 2012 was slightly negative as well.
With these poor results in the books, the company currently trades at 24 times trailing earnings. We would generally consider that a high multiple for a struggling company, even one which has some growth opportunities from construction activity. Wall Street analysts expect quite a bit of upside there, and their consensus estimate for 2013’s earnings per share is $2.16; that implies a forward P/E of 15, but depends on better results in the next several quarters than we’d want to depend on.
Other hedge fund managers also liked Owens Corning during the second quarter. Billionaire David Tepper’s Appaloosa Management increased its own stake in the company by 54% to a total of 2.3 million shares; the fund had initiated its position during the first quarter of 2012 (see more stocks that Appaloosa liked). Maverick Capital, managed by Lee Ainslie, also bought shares and closed June with 4.3 million shares in its portfolio (research more stocks that Maverick owned).
PPG Industries, Inc. (NYSE:PPG) is one peer for Owens Corning; while considerably larger at a market cap of about $18 billion, its operations include glass fiber production. Its forward P/E of 15 matches Owens Corning’s, but PPG doesn’t require as much improvement at its business to hit that figure as its trailing P/E is 20. PPG also grew its earnings by 9% on flat revenue in the third quarter compared to a year ago, and seems to be in a better position as a company.
Peers in the general building materials industry include aggregates provider Martin Marietta Materials, Inc. (NYSE:MLM), gypsum products company USG Corporation (NYSE:USG), and aggregates and concrete company Vulcan Materials Company (NYSE:VMC). USG and Vulcan had little change in revenue in their most recent quarter versus a year earlier; while Martin Marietta’s sales were up, its earnings growth was modest. These companies look like even worse values on a quantitative basis than Owens Corning does. USG and Vulcan are unprofitable on a trailing basis, with forward P/E multiples above 60; Martin Marietta trades at trailing and forward P/E multiples of 64 and 26, respectively. Even with similar optimism from analysts, these peers don’t look as attractive as Owens Corning.
We think it makes more sense to buy Owens Corning than some other building materials companies. PPG, however, looks like a better buy as it is less dependent on improving its business over the next year to justify its valuation.