CFA Research Challenge UD - Final

CFA Institute Research Challenge hosted by

CFA Society of Ohio

Chris Bendel, Peter Frac, Daniel Whitehead,

Teng Zhang, Nanjun Zhou

Academic Advisor: Jeffrey Zhang

Industry Mentor: Mark Fleming

University of Dayton

Owens Corning 2016

2 Important disclosure information provided at the end of the report

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Stock vs. S&P

OC S&P 500

Index: NYSE

Closing Price: $42.56

52-Week High /Low: $48.50 / $36.70

Average Volume (3M): 1,509,400

Diluted Shares Out.: 116,585,687

Market Cap: 4.96B

Dividend Yield: 1.52%

Next Earnings Date: 2/10/2016

P/E: 19.80

Three distinct lines of business with margins near or above 10% - Owens Corning has a diversified portfolio of businesses that have all shown stable performance in their respective markets while hitting double digit margins amidst a broad but moderate economic and housing recovery. The combination of Owens Corning’s roofing, insulation, and composites lines of business contribute to a business model and mix capable of capitalizing on strong new home starts and home maintenance as the millennial generation slowly begins to purchase housing units spurring demand for new homes and the raw materials that OC supplies to its customers.

Above-average U.S. housing recovery acts as powerful catalyst - Continual strength in United States housing will bolster demand and pricing for Owens Corning while the composites business supplements the core businesses of roofing and insulation. During 3Q2015 and during the first two quarters of 2015, new housing permits – a leading indicator for housing construction activity – and new homes starts have both trended upward indicating robust demand in the housing recovery. Combined with a low interest rate environment (based on historic measures with respect to current Fed policy) that drives demand for both new homes and secondary sales on the open market including derived demand from consumers with contractors.

Robust manufacturing & distribution chain supplies scalability - Owens Corning can react quickly to consumer demands and positions the company well for their short-cycle delivery time, a differentiator for the company within the industry. In an event of further expansion – our team’s base case that should continue to help drive the U.S. economy – OC has the capability to ramp of production to meet client demand. In the event of more modest growth, the robust OC manufacturing and distributing chain would help mitigate the symptom of rising inventory levels during a shock to the housing market.

Growth Drivers 1 Broad U.S. housing recovery

2 Sustained margin expansion in roofing, insulation, and composites portfolios

3 Scalability in production and distribution chains

4 Innovative, environmentally friendly product offering

5 Experienced management team

Newsletter Date Volume 1 Issue 1

Owens Corning Initiating Coverage: Buy

Owens Corning poised to capitalize on robust housing starts, rising home

maintenance needs with innovative and diversified product portfolio

The analyst team recommends a BUY rating for Owens Corning (OC) based on favorable business conditions in the housing market paired with firm-specific catalysts like consistently improving margins from OC’s three main and differentiated product lines – roofing, insulation, and composites. The team used a WACC of 5.59% to discount OC’s FCFF based on company guidance and internal research to arrive at an intrinsic value of 58 USD, a 36% upside from the current share price.

15 January 2016

Ticker Symbol: OC

Headquartered: Toledo, OH

Last Price (1/15/2016): $42.56

Price Target: $57.99

Recommendation: BUY

Source: Bloomberg, Yahoofinance.com

Owens Corning 2016


67.40% 12.10%

10.90%

9.60%

Revenue by Geography

United States Asia Pacific

Europe Other

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OC - 1 Year Price Performance

$0.15$0.16$0.16$0.16$0.16$0.16$0.17$0.17$0.17$0.17

OC Dividend

Owens Corning declares Fourth-Quarter 2015 Dividend, holds steady at $0.17 – 12/4/2016

OC Board of Directors declares a quarterly cash dividend of $0.17 per share to shareholders of record as of January 4, 2016 and payable on January 19, 2016

The dividend marks the fourth straight quarter dividends to shareholders remained steady at $0.17 (Figure 1)

Owens Corning announces Q3 2015 earnings beating analyst expectations; revenue increases 5.7% YoY – 10/21/2015

Reported revenues of $1,461, expanding 5.7% YoY EPS was 96 cents, beating analysts' estimates of 68 cents,

representing a 41.2% earnings surprise. Revenue was $1.46 billion, beating analysts' estimates of $1.42 billion.

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 18.23% to 23.82% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 14.40% to 18.69% compared to the same period last year. For comparison, gross margins were 21.99% and EBITDA margins were 16.90% in the last reporting period.

Owens Corning announces significant sustainability goals and renewable energy efforts – 2014-2015

OC introduces of six additional registered Material Health Certificates (MHCs) through the Cradle to Cradle Certified program and five new EPDs summarizing product life-cycle assessment (LCA) reflects Owens Corning’s industry-leading commitment to sustainability and environmental stewardship

Recent Highlights

Business Description

Owens Corning (OC) was founded in 1938 and is based in Toledo, OH. The company develops, manufactures and markets insulation, roofing and fiberglass composites. The company’s market-leading businesses use their deep expertise in materials, manufacturing and building science to develop products and systems that save energy and improve comfort in commercial and residential buildings. Through its glass reinforcements business, the company makes thousands of products lighter, stronger and more durable. Owens Corning posted 2014 sales of $5.3 billion and employs about 15,000 people in 26 countries. It has been a Fortune 500® company for 61 consecutive years as well as the Dow Jones Sustainability Index for the last 6 years.

Source: NASDAQ

Source: Bloomberg

Source: Bloomberg

Figure 3

Figure 2

Figure 1

Owens Corning 2016


36%

32%

32%

OC Revenue by Segment

Composites Insulation Roofing

10%

73%

16%

1%

Roofing Revenue by Geography

U.S. & Canada New Residential Construction

U.S. & Canada Residential Repair &Remodeling

U.S. & Canada Commercial & Industrial

International

Roofing (32% of 2014 revenue) Owens Corning is the second largest manufacturer of

asphalt roofing and laminate shingles. Revenue in this segment is driven by residential repair and remodeling, which does not follow the typical seasonal home improvement cycle due to damage from storms and natural disasters. Asphalt roofs remain the most cost-effective option for homeowners. Asphalt maintains a 55% share of the $10 billion steep-slope roofing market. This segment has been adversely affected by extended replacement ages for roofs that occurred as a result of better technology. OC has extended their product complements in the roofing segment by offering components such as VentSure and Weather Lock products that further integrate OC in to roofing construction. These components have been expanding steadily over the past five years, and have been able to grow segments revenue at an 11% rate. OC’s main focus is to continue to expand the margins on such accessories, and they include products that protect the home from weather damage and improve air flow and ventilation in attic areas. Additionally, the roofing segment utilizes the technology from the composite line of businesses in order to create mainstream products that hold up better than competitor’s, and allow them to maintain their pricing gaps verses their competition. OC’s wide product lines give them the capability to focus on specific competitive situations without impacting their overall business model. Owens Corning has the broadest asphalt shingle plant network in the industry, with 14 roofing manufacturing sites and 16 shingle production lines with the capability to make multiple shingle styles and types and serve both national and regional customers (Figure 6).

Business Segments

Figure 4

Source: Bloomberg

Figure 5

Source: Company Presentation Source: Company Presentation

Figure 6

Owens Corning 2016


40%

20%

24%

16%

Insulation Revenue by Geography




International

3%

8%

28%

61%

Composites Revenue by Geography




International

Insulation (36% of 2014 revenue) Owens Corning enjoys market leadership in the insulation portion of their business due to strong brand recognition and superior technology. Through the use of their PINK Fiberglas technology, the company has differentiated itself relative to their competitors. As the United States begins to shift towards more energy-efficient homes, demand for OC’s superior products will continue. Through the use of their EcoTouch product line, they have been able to answer the call for more environmentally friendly production of the product, as well as creating an efficiency in the sustainability of the product. Growth in the industrial and commercial segments presents an opportunity to leverage their existing relationships to Segway into new markets. As pricing recovers with the continued housing recovery, margins will continue to recover to 20+ year historical average of 15%. New home building continues to lag, but progress is being made towards recovery following the sharp downturn in ‘08. EBIT margins have continually improved reaching 8% on a trailing 12 month basis compared to a -8% that was experienced just a few years prior. Composites (32% of 2014 revenue)

Owens Corning glass fiber materials can be found in over 40,000 end-use applications within seven primary markets: power and energy, housing, water distribution, industrial, transportation, consumer and aerospace/military (Source: 10k). Owens Corning’s composites building is built on 4 foundations: cost leadership, price realization, capital efficiency, and product leadership. Demand for the company’s profits remains substantial and the segment has transformed to deliver double-digit EBIT margins and returns on capital. 75% of this segment is delivered at costs below the industry standard, up from 30% in 2007, reflecting management’s commitment to cost leadership and capital efficiency. The demand in the industry has continually picked up and is estimated to see an 800,000 tons demand growth over the next three years. Owens Corning boasts leading market positions in Europe, the Americas, the rest of the world, as well as an emerging position in China.

Figure 7

Source: Bloomberg

Figure 8

Source: Bloomberg

Investment Risks Owens Corning is a cyclical company and any sustained

downturn economically, especially in the housing market, would greatly affect business operations.

Sustained broad stock market downturn

International revenues leave Owens Corning susceptible to FX

risk.

Lower cost competitors could steal market share from Owens

Corning, who is still attempting to grow margins.

Customer concentration in the Insulation and Roofing

segments could materially affect business.

High fixed cost, capitally-intensive business creates operating leverage that will remain in place and could harm the company in a downturn.

Owens Corning 2016


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Housing Starts & Building Permits

Housing Starts Building Permits

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United States Industrial Production

MoM ∆

Economic Drivers Housing starts will remain a core driver of Owens Corning’s sales, especially in the insulation business. While housing continues to moderately improve, recent readings have come in on the low end and momentum continues to be elusive. Housing starts in the United States fell to a seven-month low in October, weighed down by a steep decline in the construction of multifamily homes. A surge in building permits, though, suggested that the housing market remained on solid ground. Groundbreaking dropped 11 percent to a seasonally adjusted annual pace of 1.06 million units last month, the lowest level since March (Figure 9). Global industrial production will dictate demand for Owens Corning composites. A continued slowdown in China will continue to negatively affect industrial output in nations across the world. In order for Owens Corning to sustain growth in this segment, the health of the global economy will have to continue to be intact. Owens Corning has a portfolio of well-recognized and patented technologies that differentiate them versus competitors. PINK and SureNail, amongst others, are the best brands in their categories and make OC a market leader. Owens Corning has established relationships across a variety of industries and product channels that will allow them to leverage relationships and continue to grow their business. As Owens Corning continues to expand their product lines and further integrate themselves in to the building process, their footprint will continue to expand geographically. Being a brand leader, Owens Corning will have to continue and build on existing relationships and lever their good relationships in to more business lines. In order to maintain continued success, Owens Corning will continue to be a brand leader and set the pace for the rest of the industry. Management has a renewed focus on returning capital and rewarding shareholders, as evidenced by their share buyback program and renewal of dividend payment. Owens Corning management has made a noted effort to deploy capital through share buybacks in order to lower equity in the company. Shares have dropped from 1.30 million to 1.16 million from 2006 to the current amount. Additionally, coming out of bankruptcy and now with the company more comfortable financially, a dividend has been in place since 2014. Each new issuance of a dividend has increased in amount and should continue to be a viable part of management’s strategy going forward.

Figure 9

Figure 10

Source: U.S. Census Bureau

Source: Bloomberg

Owens Corning 2016


Demand Drivers by Segment Roofing Demand Drivers – 80% of demand in this segment is attributable to reroofing rather than new home construction. As result, certain factors outside of the firm’s hands affect this segment. For one, storms have an effect as the effect from harsh weather bolsters demand. Additionally, demand in this segment has been hurt by extended replacement age due to better materials used in construction. Other high-end revenue streams have helped supplement this segment from the businesses’ roofing components. Management estimates that for each dollar of asphalt shingles, the company now gets 25 cents of additional revenue from components. Insulation Demand Drivers – As homes in the United States continue to rely on energy-efficiency, superior insulation will remain a crucial part of the equation. In addition to PINK, Owens Corning now has the EcoTouch and Thermafiber lines to supplement the demand for energy-efficient, sustainable insulation. Brand recognition, specifically for the PINK line, is terrific, with 72% of households recognizing PINK as the industry leader. Insulation demand is driven very much by housing starts, as demand is almost equally in line with starts. Following the housing decline and subsequent lack of housing starts, capacity in this space was largely cut off and profitability was affected. Going forward, management expects a gradual recovery in EBIT margins, which are still well-below historical levels. Composites Demand for composites, a $7.5 billion market, is driven in large part by global industrial production. The composite market grows as a multiple of industrial production, especially internationally as 61% of revenue comes from international markets. Continued switching to glass-fiber composites for their light weight and strength from traditional materials such as wood and aluminum will continue to grow the overall glass fiber market. Being the cost-advantaged supplier has allowed OC to capitalize on the market-leading position. Over 75% of composites shipped by Owens Corning are below industry-average in the markets that they serve. Repositioning high-cost assets over the last couple of years has allowed the company to lower cost and deliver superior products to customers.

Key Management CEO Michael Thaman has been with the company since 1992 and in 2000 served as CFO during the company’s bankruptcy. Thaman’s leadership during bankruptcy helped salvage the company and return it to a positive cash flow company with much healthier financials. As a result, Thaman has remained an integral part of the strength in Owen Corning’s leadership during his rise to becoming CEO. Thaman has served in a variety of leadership roles with Owens Corning and has intimate knowledge of the organizational vision for the company. Thaman’s time as CEO has been filled with both divestments and acquisitions such as the dealings with Saint-Gobain in 2007 in which Owens Corning sold its vinyl siding business and acquired Saint-Gobain’s reinforcements and composite fabrics business. Presidents Julian Francis, Arnuad Genis and Brian Chambers, each of whom head Owens Corning’s 3 business segments, all have been with the company in various roles for over 8 years. Julian Francis has lead the Insulation business since October of 2014. Julian’s experience with the company stretches back several years through his roles in the glass reinforcements as well as composite solutions business. Arnuad Genis joined Owens Corning in 2007 from the Saint-Gobain’s reinforcements business and serves as president of Composite Solutions since 2010. Genis’ has been in the industry for nearly 30 years through his work with Owens Corning as well as Saint-Gobain. Lastly, Brian chambers serves as president of the Roofing and Asphalt business, taking leadership in October 2014 after serving as the vice president and general manager of the business. Chambers has been with the company since 2000. Their expertise and deep knowledge of their industries put OC in a position to capitalize in a new upswing for the industry.

Owens Corning 2016


Financial Condition Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Est Q1 2016 Est

03/31/2011 06/30/2011 09/30/2011 12/31/2011 03/31/2012 06/30/2012 09/30/2012 12/31/2012 03/31/2013 06/30/2013 09/30/2013 12/31/2013 03/31/2014 06/30/2014 09/30/2014 12/31/2014 03/31/2015 06/30/2015 09/30/2015 12/31/2015 03/31/2016

Profitability

Gross Margin 16.32% 19.23% 21.86% 19.23% 13.82% 17.18% 15.83% 14.67% 15.78% 19.82% 19.17% 18.23% 18.31% 18.30% 18.16% 19.27% 17.32% 21.78% 23.27% 20.15% 18.62%

Operating Profit Margin 4.93% 9.30% 12.21% 7.36% -0.89% 6.11% 4.62% 1.38% 4.22% 8.76% 8.03% 8.14% 8.45% 5.39% 7.74% 8.25% 4.81% 11.03% 13.42% 8.62% 6.97%

Net Profit Margin 1.94% 5.38% 8.55% 4.18% -3.42% 2.80% 3.45% -4.83% 1.63% 3.64% 3.86% 6.42% 9.39% 1.55% 3.76% 2.62% 1.49% 6.44% 7.67% 4.32% 3.80%

Return on Assets 0.32% 1.03% 1.62% 0.66% -0.59% 0.51% 0.57% -0.74% 0.28% 0.63% 0.66% 1.07% 1.51% 0.27% 0.68% 0.44% 0.23% 1.19% 1.49%

Return on Equity 0.64% 2.04% 3.28% 1.34% -1.24% 1.07% 1.20% -1.57% 0.61% 1.35% 1.40% 2.14% 3.08% 0.54% 1.33% 0.88% 0.49% 2.43% 2.97%

Liquidity

Current Ratio 1.69x 1.50x 1.51x 1.80x 2.01x 1.98x 1.98x 1.77x 2.05x 2.04x 2.02x 1.86x 2.25x 2.28x 2.10x 1.84x 2.19x 2.11x 1.91x

Cash Ratio 0.02x 0.01x 0.01x 0.01x 0.01x 0.01x 0.01x 0.01x 0.01x 0.02x 0.01x 0.01x 0.02x 0.02x 0.01x 0.02x 0.02x 0.02x 0.02x

Activity

Account Receivable Turnover 1.84x 1.80x 1.72x 1.80x 1.64x 1.62x 1.69x 1.82x 1.61x 1.71x 1.77x 1.57x 1.51x 1.58x 1.60x 1.59x 1.67x 1.70x 2.98x

Total Asset Turnover 0.19x 0.19x 0.16x 0.18x 0.18x 0.17x 0.15x 0.18x 0.17x 0.17x 0.17x 0.16x 0.17x 0.18x 0.17x 0.16x 0.18x 0.19x 0.34x

Fixed Asset Turnover 0.51x 0.51x 0.42x 0.46x 0.48x 0.44x 0.40x 0.47x 0.47x 0.46x 0.44x 0.44x 0.47x 0.48x 0.44x 0.42x 0.49x 0.51x 0.89x

Financial Leverage

Long-term Debt to Assets 0.26x 0.23x 0.24x 0.26x 0.28x 0.29x 0.28x 0.27x 0.29x 0.29x 0.28x 0.26x 0.30x 0.29x 0.28x 0.26x 0.30x 0.28x 0.26x

Long-term Debt to Equity 0.51x 0.45x 0.48x 0.52x 0.59x 0.60x 0.60x 0.58x 0.64x 0.62x 0.60x 0.53x 0.60x 0.58x 0.56x 0.53x 0.62x 0.58x 0.52x

Debt to Equity 0.99x 0.98x 1.03x 1.01x 1.10x 1.11x 1.09x 1.12x 1.18x 1.15x 1.12x 1.00x 1.04x 0.99x 0.97x 1.03x 1.09x 1.05x 0.99x

Equity Multiplier 1.99x 1.98x 2.03x 2.01x 2.10x 2.11x 2.09x 2.12x 2.18x 2.15x 2.12x 2.00x 2.04x 1.99x 1.97x 2.03x 2.09x 2.05x 1.99x

Interest Coverage 2.44x 4.82x 6.32x 3.26x -0.43x 3.04x 2.03x 0.55x 1.97x 4.07x 3.66x 4.16x 4.00x 2.35x 3.82x 3.71x 2.23x 6.00x 7.00x

Shareholder Ratio

Dvidend Payout Ratio 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 90.48% 34.62% 57.58% 216.67% 0.00% 16.96%

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5.00%

10.00%

15.00%

20.00%

25.00%

Dupont ROE

Financial Analysis DuPont Analysis Based on team analysis of the OC’s 2014 fiscal results, team analysts computed a DuPont ROE of 6.06%. The analysis used the inputs of operating efficiency, asset use efficiency, and the amount of financial leverage on the Balance Sheet. To this end, the team computed net profit margin, the asset turnover ratio, and the equity multiplier for OC’s 2014 fiscal year and the most recent 12 month results for four of its competitors. It is important to note that OC operates with three segments that are not ultimately comparable to the competitors listed but the competitors provide the best possible proxy for comparison with manufactures that rely on the robustness of the housing industry to generate bottom-line results. The team calculated a net profit margin 4.28%, an asset turnover ratio of .7, and an equity multiplier value of 2.03. The equity multiplier value helps drive ROE in financial leverage commensurate with competitor average. OC lags in net profit

Source: Team Calculations

margin (see Appendix B), dragging down ultimate ROE, though management continues to improve this part of the equation as noted below indicating management attentiveness to operating performance to help drive the projected increase in ROE. Likewise, with an asset turnover ratio of .7, OC management must remain vigilant in utilizing current capital assets and creating shareholder value with the addition of efficient capital improvements in manufacturing and distribution process. Profitability Ratios The OC management team has steadily guided profit margins up from lows relative to the last five years of operating performance. The gross margin, operating profit margin and net profit margin have all recovered from the end of 2011 and the beginning of 2012. The key aforementioned profitability indicators remain stable and exhibited healthy growth in 2014 and 2015.

Figure 12

Figure 11

Source: Team Calculations, Company Financials

Owens Corning 2016


The analyst team forecasts further expansion in gross and operating margins in the near term based on growth drivers in the housing industry.

Gross margin decreased from 21.86% in Q3 2011 to 13.82% in Q1 2012. After then it gradually increased

to 19.27%, 17.32%, 21.78% and 23.27% in Q4 2013, Q1 2015, Q2 2015 and Q3 2014, respectively.

Operating profit margin ratios decreased from 8.45% in 2011 to 2.81% in 2012. After then, it rose to

11.03% and 13.42% in Q2 and Q3 2015 respectively.

Return on equity was 1.82% in 2011, which deteriorates in 2012. The ROE went down to -.0.01% in 2012.

After then, it recovered from 1.38% in 2013, 1.46% in 2014 and 1.96 in 2015.

Liquidity Ratios OC’s current ratio has increased from around 1.5x in 2011 to around 2.0x in 2015, which means the company has improved its ability to pay short-term and long-term obligations. Also, OC displayed the same type of improvement in the cash ratio – computed with only the most liquid asset accounts of cash and cash equivalents on the company’s balance sheet. Activity Ratios OC’s activity ratios have not changed dramatically over the last five years of operations and remain stable heading into fiscal year 2015. The annual total asset turnover ratio has hovered around 0.17x over the past five years. The fixed asset turnover decreased slightly in 2012, 2013 and 2014 but in 2015 the fixed asset turnover accelerated, reaching the same level as the first quarter in 2011 – a strong reading relative to company history. Overall, OC has remained efficient in using its various assets but the metrics do not reflect significant acceleration over the last few years. Financial Leverage Ratios The average long-term debt to assets ratios was 0.25x in 2011 and increased to around 0.28x in 2012, 2013, 2014. In Q3 2015, it went back to the Q1 2011 level, which is 0.26x. The long-term debt to assets ratios do not change dramatically since 2011. The ratio provides a general measure of the financial position of Owens Corning and whether the company has the ability to meet all its financial requirements for long term debt. The ratios indicate that Owens Corning has around $0.27 in long term debt for each dollar it has in assets. It shows that Owens Corning have the stable ability to meet principal and interest on its obligations of long term debts. OC’s debt to equity ratio increased from 0.99x in Q1 2011 to 1.18x in Q1 2013. In the subsequent quarters, the debt to equity ratios reverted back to 0.99x as of Q3 2015. Although the debt to equity ratios were high compared to OC’s history in 2012 and 2013, the current reading reflects a leverage position that remains stable indicating management expertise in maintaining its target capital structure. The interest coverage ratio was -0.43x in the first quarter in 2012 due to the negative EBIT. Specifically, in the second and third quarters of 2015, this ratio sharply increased to 6.0x and 7.0x, respectively. From this phenomena, the team contends the ability of the company to meet its interest payments remains strong and will trend higher in the future.

Owens Corning 2016


OC 21.12

Industry 21.6

EPS(ttm) EPS FV 2016

OC 2.15 2.92

P/E

Risk Free Rate 2.22

Market Risk Premium 0.052992

Beta 1.01478

Cost of Equity 7.60%

Cost of Debt 3.58%

Average weight of Debt 50.00%

Average weight of Equity 50.00%

WACC 5.59%

WACC Analysis

2014Q4-2015Q3 2015Q4-2016Q3 2016Q4-2017Q3 2017Q4-2018Q3 2018Q4-2019Q3 2019Q4-2020Q3

Year 2014 2015 2016 2017 2018 2019

FCFF 490.3 514.8 540.5 567.6 596.0 601.9

FCFF after considering TV2018 514.8 540.5 567.6 9866.5

WACC 7.49% 7.49% 7.49% 7.49%

Discount rate 1.0749 1.1555 1.2420 1.3351

PV of FCFF 478.9 467.8 457.0 7390.0

Sum of PV(FCFF) 8,793.7

Cash 67

Firm value 8,860.73

# of shares outstanding 118.30

Total Debt 2,000.00

OC stock instrinc value 57.99

OC stock price as of 4/19

So our recommendation is: BUY

Valuation

FCFF Model Since Owens Corning began to pay dividends in 2014 and any dividend policy remains volatile, the team used the FCFF model to determine its intrinsic value (Figure 15). The assumed growth rate in the FCFF is 5% in the following four years and after that the constant long term growth rate is 1%. According to 10-yr Treasure bonds yield, the team assumed a risk free rate of 2.22%. The beta of Owens Corning is 1.01478, according to Yahoo Finance and according to the Shiller website the market risk premium is 0.052992. WACC Analysis The weighted average cost of debt and equity are from the historical data which is around 50%, so we use 50% as a future financial structure at Owens Corning. We expect the interest rate of debt will slightly rise because the United States Federal Reserve has increased interest rates. In the team’s model, the interest rate is

5.05% in 2012, 5.31% in 2013, 5.05% in 2014 and 5.40% in 2015. Our projected interest rate in the following five years is 5.50%. The cost of equity is based on the CAPM calculation.

Forward P/E Calculation

As our estimation, we expect the 2016 EPS of Owens corning will be $2.92 per share. Also, we find the industry P/E is 21.60. We use P/E to calculate the intrinsic value which is equal to $63.07. It confirms our buy recommendation as the FCFF model which determines the intrinsic value is $57.99.

Figure 15

Figure 13

Figure 14



Owens Corning 2016


Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with the CFA Society of Ohio, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

Owens Corning 2016


Appendix: OC Valuation Using Two-Stage FCFF ModelStable stage assumptions

FCFF growth rate 1.00%

D/(D+E) 50%

Estimated FCFF Beta 1.74

Historical FCFF FYE2015 FYE2016 FYE2017 FYE2018 FYE2019 Cost of equity 0.11411

WACC 0.07493

Growth stage assumptions FCFF 490.29$ 514.81$ 540.55$ 567.58$ 595.95$ 601.91$

FCFF growth rate 5.00%

Growth stage from

FYE 2015 to 2018 Terminal Value = 9270.53231 -$

Sum of Terminal Value and

-$ 514.81$ 540.55$ 567.58$ 595.95$ 9,872.45$ FCFF in FYE2018

478.92$

PV of all FCFF 8,794$ 467.82$

456.97$

7,390.02$

+Cash 67$

=Firm Value 8,861$ 7.4928%

-Debt 2,000.00$

=Equity 6,861

-Stock Options -

=Equity in Common Stock 6,861

# of shares outstanding 118 Weights D= 50.00%

True value/Share 57.9943$ E= 50.00%

+ XRisk free rate Equity beta MRP

2.19% 1.7400 0.0530

Cost of equity Cost of debt

11.4105% 5.50%

Discount at WACC

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

Profit Margin

0.000.200.400.600.801.001.201.401.601.80

Asset Turnover

0.0000.5001.0001.5002.0002.5003.0003.5004.000

Equity Multiplier

Appendix A

Appendix B

Owens Corning 2016


Owens Cornings (OC)

Balance Sheet

$ in Millions

Q4 Q1 Q2 Q3 Q4,14 - Q3, 15 Q4 Q1 Q2 Q3 Q4,15 - Q3, 16 Q4 Q1 Q2 Q3 Q4,16 - Q3, 17

Cash, Cash Equivalents & STI 67.0$ 77.0$ 80.0$ 62.0$ 62.0$ 147.2$ 393.4$ 476.3$ 527.8$ 527.8$ 632.9$ 907.3$ 1,007.4$ 1,081.1$ 1,081.1$

Accounts & Notes Receivables 674.0$ 844.0$ 853.0$ 861.0$ 861.0$ 707.7$ 886.2$ 895.7$ 904.1$ 904.1$ 743.1$ 930.5$ 940.4$ 949.3$ 949.3$

Inventories 817.0$ 825.0$ 786.0$ 701.0$ 701.0$ 857.9$ 866.3$ 825.3$ 736.1$ 736.1$ 900.7$ 909.6$ 866.6$ 772.9$ 772.9$

Other ST Assets 249.0$ 249.0$ 261.0$ 251.0$ 251.0$ 261.5$ 261.5$ 274.1$ 263.6$ 263.6$ 274.5$ 274.5$ 287.8$ 276.7$ 276.7$

Total Current Assets 1,807.0$ 1,995.0$ 1,980.0$ 1,875.0$ 1,875.0$ 1,974.2$ 2,407.3$ 2,471.3$ 2,431.5$ 2,431.5$ 2,551.2$ 3,021.9$ 3,102.1$ 3,079.9$ 3,079.9$

-$ -$

Property and Equipment- Net 2,899.0$ 2,851.0$ 2,891.0$ 2,885.0$ 2,885.0$ 2,979.3$ 3,082.9$ 3,197.0$ 3,322.4$ 3,322.4$ 3,447.9$ 3,585.9$ 3,737.6$ 3,904.6$ 3,904.6$

LT Investments & Receivables -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

GoodWill 1,168.0$ 1,168.0$ 1,168.0$ 1,167.0$ 1,167.0$ 1,167.0$ 1,167.0$ 1,167.0$ 1,167.0$ 1,167.0$ 1,167.0$ 1,167.0$ 1,167.0$ 1,167.0$ 1,167.0$

Other Intangible Assets 1,017.0$ 1,013.0$ 1,010.0$ 1,004.0$ 1,004.0$ 1,004.0$ 1,004.0$ 1,004.0$ 1,004.0$ 1,004.0$ 1,004.0$ 1,004.0$ 1,004.0$ 1,004.0$ 1,004.0$

Other Assets 664.0$ 669.0$ 630.0$ 580.0$ 580.0$ 357.5$ -214.7 $ -183.6 $ -41.4 $ -41.4 $ -306.1 $ 206.9$ 201.6$ 309.0$ 309.0$

Total Noncurrent Assets 5,748.0$ 5,701.0$ 5,699.0$ 5,636.0$ 5,636.0$ 5,507.7$ 5,039.2$ 5,184.4$ 5,452.0$ 5,452.0$ 5,312.8$ 5,963.7$ 6,110.3$ 6,384.6$ 6,384.6$

Total Assets 7,555.0$ 7,696.0$ 7,679.0$ 7,511.0$ 7,511.0$ 7,481.9$ 7,446.5$ 7,655.6$ 7,883.5$ 7,883.5$ 7,864.0$ 8,985.6$ 9,212.4$ 9,464.5$ 9,464.5$

-$

Accounts Payable and Accrued Liabilities 949.0$ 888.0$ 921.0$ 958.0$ 958.0$ 996.5$ 932.4$ 967.1$ 1,005.9$ 1,005.9$ 1,046.3$ 979.0$ 1,015.4$ 1,056.2$ 1,056.2$

ST Borrowings 31.0$ 14.0$ 9.0$ 18.0$ 18.0$ 18.0$ 18.0$ 18.0$ 18.0$ 18.0$ 18.0$ 18.0$ 18.0$ 18.0$ 18.0$

Current Portioin of LT Debt 3.0$ 3.0$ 3.0$ 3.0$ 3.0$ 3.0$ 3.0$ 3.0$ 3.0$ 3.0$ 3.0$ 3.0$ 3.0$ 3.0$ 3.0$

Other ST Liabibities -$ 7.0$ 4.0$ 5.0$ 5.0$ 5.0$ 5.0$ 5.0$ 5.0$ 5.0$ 5.0$ 5.0$ 5.0$ 5.0$ 5.0$

Total Current Liabilities 983.0$ 912.0$ 937.0$ 984.0$ 984.0$ 1,022.5$ 958.4$ 993.1$ 1,031.9$ 1,031.9$ 1,072.3$ 1,005.0$ 1,041.4$ 1,082.2$ 1,082.2$

-$

LT Debt 1,991.0$ 2,274.0$ 2,165.0$ 1,979.0$ 1,979.0$ 1,979.0$ 1,979.0$ 1,979.0$ 1,979.0$ 1,979.0$ 1,979.0$ 1,979.0$ 1,979.0$ 1,979.0$ 1,979.0$

Pension Liabilities 699.0$ 673.0$ 661.0$ 618.0$ 618.0$ 618.0$ 618.0$ 618.0$ 618.0$ 618.0$ 618.0$ 618.0$ 618.0$ 618.0$ 618.0$

Other Liabilities 152.0$ 154.0$ 168.0$ 156.0$ 156.0$ 159.6$ 161.7$ 176.4$ 163.8$ 163.8$ 167.6$ 169.8$ 185.2$ 172.0$ 172.0$

Total Noncurrent Liabilities 2,842.0$ 3,101.0$ 2,994.0$ 2,753.0$ 2,753.0$ 2,756.6$ 2,758.7$ 2,773.4$ 2,760.8$ 2,760.8$ 2,764.6$ 2,766.8$ 2,782.2$ 2,769.0$ 2,769.0$

Total Liabilities 3,825.0$ 4,013.0$ 3,931.0$ 3,737.0$ 3,737.0$ 3,779.1$ 3,717.1$ 3,766.5$ 3,792.7$ 3,792.7$ 3,836.9$ 3,771.8$ 3,823.6$ 3,851.2$ 3,851.2$

-$

Common Stock 1.0$ 1.0$ 1.0$ 1.0$ 1.0$ 1.0$ 1.0$ 1.0$ 1.0$ 1.0$ 1.0$ 1.0$ 1.0$ 1.0$ 1.0$

Paid In Captical 3,954.0$ 3,946.0$ 3,950.0$ 3,959.0$ 3,959.0$ 3,959.0$ 3,959.0$ 3,959.0$ 3,959.0$ 3,959.0$ 3,959.0$ 3,959.0$ 3,959.0$ 3,959.0$ 3,959.0$

Retained Earnings -550.0 $ -591.0 $ -584.0 $ -617.0 $ -617.0 $ -567.4 $ -538.8 $ -453.5 $ -348.5 $ -348.5 $ -285.3 $ -244.5 $ -147.8 $ -24.7 $ -24.7 $

Tresury Stock 518.0$ 515.0$ 533.0$ 574.0$ 574.0$ 574.0$ 574.0$ 574.0$ 574.0$ 574.0$ 574.0$ 574.0$ 574.0$ 574.0$ 574.0$

Other Equity 805.0$ 803.0$ 874.0$ 966.0$ 966.0$ 845.3$ 843.2$ 917.7$ 1,014.3$ 1,014.3$ 887.5$ 885.3$ 963.6$ 1,065.0$ 1,065.0$

Minority Interest 38.0$ 39.0$ 40.0$ 39.0$ 39.0$ 39.0$ 39.0$ 39.0$ 39.0$ 39.0$ 39.0$ 39.0$ 39.0$ 39.0$ 39.0$

Total Equity 3,730.0$ 3,683.0$ 3,748.0$ 3,774.0$ 3,774.0$ 3,702.9$ 3,729.4$ 3,889.2$ 4,090.8$ 4,090.8$ 4,027.2$ 5,213.8$ 5,388.8$ 5,613.3$ 5,613.3$

Total Liabilities & Shareholders' Equity 7,555.0$ 7,696.0$ 7,679.0$ 7,511.0$ 7,511.0$ 7,481.9$ 7,446.5$ 7,655.6$ 7,883.5$ 7,883.5$ 7,864.0$ 8,985.6$ 9,212.4$ 9,464.5$ 9,464.5$

Q4 2014 - Q3 2015 Actual Q4 2015 - Q3 2016 Estimated Q4 2016 - Q3 2017 Estimated

Appendix C

Owens Corning 2016


Owens Corning (OC)

Cash Flow Statement

$ in Millions


Net Income 33.0$ 18.0$ 91.0$ 112.0$ 254.0$ 68.9$ 47.9$ 104.5$ 124.2$ 345.5$ 82.5$ 60.0$ 115.9$ 142.3$ 400.8$

Depreciation and amotization 75.0$ 75.0$ 76.0$ 73.0$ 299.0$ 80.3$ 88.3$ 97.2$ 106.9$ 372.7$ 117.6$ 129.3$ 142.3$ 156.5$ 545.6$

Stock-Based Compensation 8.0$ 8.0$ 6.0$ 8.0$ 30.0$ 8.0$ 8.0$ 8.0$ 8.0$ 32.0$ 8.0$ 8.0$ 8.0$ 8.0$ 32.0$

Defferred Income Taxes -11.0 $ 4.0$ 33.0$ 38.0$ 64.0$ 38.0$ 38.0$ 38.0$ 38.0$ 152.0$ 38.0$ 38.0$ 38.0$ 38.0$ 152.0$

Other Non-cash Adjustment 67.0$ -10.0 $ -20.0 $ -26.0 $ 11.0$ -- -- -- -- -- -- -- -- -- -$

Dec (Inc) in Accounts Receivables -- -- -- -- -- -153.3 $ 178.5$ 9.5$ 8.4$ 43.1$ -161.0 $ 187.4$ 9.9$ 8.8$ 45.2$

Dec (Inc) in Inventories -- -- -- -- -- 156.9$ 8.4$ -41.0 $ -89.2 $ 35.1$ 164.7$ 8.8$ -43.0 $ -93.7 $ 36.8$

Dec (Inc) in Other 246.0$ -244.0 $ 43.0$ 99.0$ 144.0$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Net Cash From Disc Ops -$ -- -$ -$ -- -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Cash from Operating Activities 379.0$ -149.0 $ 229.0$ 304.0$ 763.0$ 198.7$ 369.1$ 216.2$ 196.3$ 980.2$ 249.8$ 431.6$ 271.1$ 259.9$ 1,212.4$


Appendix D

Owens Corning 2016


Quarterly Results & Estimates

$ in Millions


Dec-14 Mar-15 June-15 Sep-15 Dec-15 Mar-16 June-16 Sep-16 Dec-16 Mar-17 June-17 Sep-17

Revenue 1,261$ 1,207$ 1,414$ 1,461$ 5,343$ 1,324$ 1,267$ 1,485$ 1,534$ 5,610$ 1,390$ 1,331$ 1,559$ 1,611$ 5,891$

Growth -1.3% -5.6% 4.4% 5.7% 0.9% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Cost of Goods & Services 1,018$ 998$ 1,106$ 1,121$ 4,243$ 1,058$ 1,038$ 1,151$ 1,166$ 4,412$ 1,098$ 1,078$ 1,200$ 1,208$ 4,585$

Gross Profit 243$ 209$ 308$ 340$ 1,100$ 266$ 229$ 334$ 368$ 1,198$ 292$ 253$ 359$ 403$ 1,306$

Gross Margin 19.3% 17.3% 21.8% 23.3% 20.6% 20.1% 18.1% 22.5% 24.0% 21.3% 21.0% 19.0% 23.0% 25.0% 22.2%

SG&A 115$ 129$ 130$ 130$ 504$ 119$ 114$ 134$ 138$ 505$ 125$ 120$ 140$ 145$ 530$

SG&A Margin 9.1% 10.7% 9.2% 8.9% 9.4% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%

Research & Development 19$ 17$ 18$ 18$ 72$ 17$ 16$ 19$ 20$ 73$ 18$ 17$ 20$ 21$ 77$

R&D Margin 1.5% 1.4% 1.3% 1.2% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%

Other Operating Expense 5.0 5.0 4.0 -4.0 10.0 -- -- -- -- -- -- -- -- -- --

Operating Income 104$ 58$ 156$ 196$ 514$ 130$ 99$ 181$ 210$ 620$ 149$ 116$ 198$ 237$ 699$

Operating Margin 8.2% 4.8% 11.0% 13.4% 9.6% 9.8% 7.8% 12.2% 13.7% 11.0% 10.7% 8.7% 12.7% 14.7% 11.9%

Interest Expense, Net 28.0 26.0 26.0 28.0 108.0 27.0 27.0 26.0 26.0 106.0 26.0 26.0 26.0 26.0 104.0

Other Non-Op Income (Loss) 46.0 0.0 -5.0 0.0 41.0 -- -- -- -- -- -- -- -- -- --

Pretax Income 30.0 32.0 135.0 168.0 365.0 102.8 71.9 155.1 184.2 513.9 122.8 89.8 172.0 210.8 595.3

Income Tax Expense (Benefit) -4 $ 13$ 44$ 55$ 108$ 33$ 23$ 50$ 59$ 164$ 39$ 29$ 55$ 67$ 190$

(Income) Loss from Affiliates 0.0 0.0 -1.0 0.0 -1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Income-Continuing Operations 34$ 19$ 92$ 113$ 258$ 70$ 49$ 105$ 125$ 349$ 83$ 61$ 117$ 143$ 405$

Net Income-Discontinued Operations 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Income (Loss) Incl. MI 34$ 19$ 92$ 113$ 258$ 70$ 49$ 105$ 125$ 349$ 83$ 61$ 117$ 143$ 405$

Minority Interest 1.0 1.0 1.0 1.0 4.0 1.0 1.0 1.0 1.0 4.0 1.0 1.0 1.0 1.0 4.0

Net Income, GAAP 33$ 18$ 91$ 112$ 254$ 69$ 48$ 104$ 124$ 345$ 82$ 60$ 116$ 142$ 401$

Profit Margin 2.6% 1.5% 6.4% 7.7% 4.8% 5.2% 3.8% 7.0% 8.1% 6.2% 5.9% 4.5% 7.4% 8.8% 6.8%

Diluted Weighted Average Shares 118.1 118.5 118.3 118.3 118.3 118.3 118.3 118.3 118.3 118.3 118.3 118.3 118.3 118.3 118.3

Diluted EPS 0.28 0.15 0.77 0.95 2.15 0.58 0.40 0.88 1.05 2.92 0.70 0.51 0.98 1.20 3.39

Earnings Growth -59.5% -85.0% 327.4% 115.2% -7.5% 108.4% 166.3% 14.8% 10.9% 36.0% 19.7% 25.5% 11.0% 14.6% 16.0%


Appendix E

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