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CFA Equity Research Competition
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Transcript of CFA Equity Research Competition
NYSE: Owens CorningDate: April 12, 2016
CFA Research Challenge - 2016 ▪ Ohio State University, Columbus Ohio
Share Price at Initiation $40.52
Target Price $50.48
Recommendation: Buy
Target Price
Method Valuation
Sum of Parts $47.90
Discounted Cash Flow $45.88
Relative Valuation $57.67
Average $50.48
24.6%upside
Investment Thesis
1. Continued U.S housing market recovery that
drives up insulation and roofing sales
2. Rising capacity utilization leads to higher
margin in the composite sector
3. Efficient cost cutting activities that improves
price competitiveness
2
$20.0
$25.0
$30.0
$35.0
$40.0
$45.0
$50.0
$55.0
0.0
2,000,000.0
4,000,000.0
6,000,000.0
8,000,000.0
10,000,000.0
12,000,000.0
14,000,000.0
Share Price and Volume
Market Profile
34%
33%
32%
Revenue by Segment
Composites Insulation Roofing
Price - (April 08, 2016) $48.68Price at Initiation - (February 12, 2016) $40.5252- week price rangeAdj. Beta 0.97Market cap. (US$ m) $4,724.1Enterprise value (US$ m) $7,542.8Dividend Yield 1.8% Return On Equity 4.5% EPS 2015 $2.79P/E (TTM) 14.5 x
NYSE: Owens Corning
$37.29 - $49.69
3
Essentials Leadership positions across all business
segments
6 consecutive quarters of earnings surprise
70% brand recognition
Operations across 26 countries
Business DescriptionComposites Downstream and Reinforcements
Driven by continued international growth of industrial production
Characterized by diverse applications
Insulation Market is split into commercial, residential, and industrial
Driven by housing market recovery and new building codes
Expanding product mix such as Thermafiber
Roofing Roofing shingles and components
Mainly driven by replacement need
Low oil prices decrease asphalt costs
Industry Valuation Risk AnalysisBusiness Description
Financial Analysis 4
Composites Industry $7.5 billion global market with a 5%-
7% CAGR
Capacity utilization is expected to
remain above 90% through 2018
Pricing power shifts to suppliers
2005-2009 2010-2015(E) 2016(E)-2018(E)0.0
0.5
1.0
1.5
2.0
0.5
1.7
0.8
1.7
0.8
0.5
Estimated Global Demand/Capacity
Change in global demand Change in global capacityM
illio
ns o
f Ton
s
Business Description Industry Valuation Risk AnalysisFinancial
Analysis 5
Insulation Industry
2010 2011 2012 2013 2014 201550
100
150
200
New Housing Starts & Existing Home Sales
New Housing Starts Existing Home Sales
Inde
xed,
201
0 =
100
Business Description Valuation Risk AnalysisFinancial
AnalysisIndustry
Market size will reach $10.4 billion by
2019 with a 7% CAGR
The market is currently driven by
recovery on U.S. housing market
and new building codes
Rising demand and constrained
capacity lead to widening EBIT
margin
6
Roofing Industry
2009 2010 2011 2012 2013 2014 2015(f) 2016(f) 2017(f) 2018(f)0
25
50
75
100
125
-15%
-10%
-5%
0%
5%
10%
15%
11 11 11 14 17 18 19 22.0426.97971191980627.7891032774002
10997
111 104 94 89 8890
89 89
U.S. Asphalt Shingle Market Demand
New Construction Re-Roofing Growth ( Right )
MM
Sq.
Business Description Valuation Risk AnalysisFinancial
AnalysisIndustry
A $20 billion industry with a 3.9%
CAGR
Demand is driven by necessary
replacement
We expect slight revenue growth but
stable profit margin because of
antitrust investigation
7
Financial Analysis
Business Description Industry Financial
Analysis Valuation Risk Analysis
2014 2015(f) 2016(f) 2017(f) 2018(f) 2019(f)$3.0
$3.5
$4.0
$4.5
$5.0
$5.5
$3.19$3.47
$4.31
$5.04 $4.93 $4.98
Unlevered Free Cash Flow per Share
2014 2015(f) 2016(f) 2017(f) 2018(f) 2019(f)$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$1.91
$2.40
$3.26
$3.71 $3.67 $3.81
Earnings per Share
Cash Flow and EPS Forecast
Free cash flow will be driven by
improved operating performance and
tax loss carryforwards
Increasing free cash flow leads to
continued share repurchases and
higher EPS
8
Financial Analysis
Business Description Industry Financial
Analysis Valuation Risk Analysis
2012
2013
2014
2015(f)
2016(f)
2017(f)
2018(f)
2019(f)
$0.0
$500.0
$1,000.0
$1,500.0
$2,000.0
$2,500.0
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
1.8 1.8 1.9 2.0 2.0 2.1 2.2 2.3
5% 4%
7%9%
10% 11%9% 9%
Composite
Revenue EBIT Margin
2012
2013
2014
2015(f)
2016(f)
2017(f)
2018(f)
2019(f)$0.0
$500.0
$1,000.0
$1,500.0
$2,000.0
$2,500.0
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
1.4 1.6 1.7 1.8 1.9 2.1 2.2 2.4
-3%
2%
5%7%
9% 9% 9% 9%
Insulation
Revenue EBIT Margin
2012
2013
2014
2015(f)
2016(f)
2017(f)
2018(f)
2019(f)
$0.0
$500.0
$1,000.0
$1,500.0
$2,000.0
$2,500.0
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
2.0 1.9 1.7 1.8 1.8 1.9 2.0 2.1
17%16%
12%
14%15% 16%
15%13%
Roofing
Revenue EBIT Margin
Billions Billions Billions
9
Implied share price of $50.48 is calculated
from the average of a:
Sum-Of-Parts DCF
$46.19 - $53.59
Pro-Forma Financial Statement DCF
$44.69 - $53.94
Relative Valuation
$49.31 - $58.71
Valuation
Relative Valuation
Pro-Forma Financial Statement
Sum-of-Parts
$40.0 $45.0 $50.0 $55.0 $60.0
Implied Price Ranges
$58.71
$44.69 $53.94
$53.59$46.19
$49.31
Business Description Industry Risk AnalysisFinancial
Analysis Valuation10
Relative Valuation
Business Description Industry Risk AnalysisFinancial
Analysis Valuation
Company TickerLarge-CapPPG Industries PPGCRH Public Limited Company CRHMid-CapRPM International Inc. RPMCarlisle Companies Incorporated CSLUSG Corporation USGBeacon Roofing Supply Inc. BECNSmall-CapPatrick Industries, Inc. PATKBluelinx Holdings Inc. BXC
Comps EV/EBITDA P/EMedian 10.5x 23.2xAverage 12.3x 24.5xHigh 12.8x 32.8xLow 9.4x 16.8x
Implied Share PriceEV/EBITDA $57.67Forward P/E $55.27
Methods
Comparable companies from all 3 business segments where examined
Median EV/EBITDA multiples where chosen for the implied share price
11
DCF Assumptions
Business Description Industry Risk AnalysisFinancial
Analysis Valuation
Forecasting & Terminal Value
Industry growth assumptions were the basis for forecasting
total revenue and individual segment revenues
Management guidance directed expectations for segment
specific and firm-wide CAPEX and EBIT forecasts
Historical medians were used to forecast NWC
Firm-wide Beta is calculated from weekly market data
Segment Beta is calculated from comparable product
segment companies unlevered Beta
Cost of equity of 9.59%
Cost of debt of 2.1% is based off of the weighted average
cost of outstanding debt
AssumptionsPro-Forma Financial Statement DCF
Exit Multiple (EV/EBITDA) 9.4xWeighting 50.0%
Perpetual Growth Rate 3.3%Weighting 50.0%
Firm-Wide WACC 7.4%
Sum-of-Parts DCFExit Multiple
Composites 8.5xInsulation 6.8xRoofing 6.3x
Segment WACCComposites 6.74%Insulation 5.14%Roofing 7.65%
12
International & Other Uses26.0%
North American Residential51.8%
North American Industrial & Commercial
22.2%
Firm-Wide SalesBy region and application
Risks
Business Description Industry Valuation Risk AnalysisFinancial
Analysis
High North American Exposure
74.0% of firm-wide revenue from North America
51.8% of firm-wide revenue from US Residential
Market
Global Economic Slowdown
60% of composites revenue is international
Industrial production trending lower in major
markets
Volatility in Oil Price
Lag has increased from 3 to 6 months
Oil prices may adversely affect the margin in the
roofing segment 2H15
1H16
$20
$40
$60
$80
$100
$120
Crude Oil Spot Prices (WTI, per barrel)
13
Recommendation: Buy
UpsideIntrinsic Value $ 50.48 Price (at initiation) $ 40.52 + 24.58%Price (04/08/2016) $ 48.68 + 3.69%
Buy
Resilient US economy
Expansion into new markets
Acquisition of higher
performing assets
Cost reduction
6 consecutive quarters of earnings surprises
14
Appendix
Capacity Expansion in Fiberglass Industry
Roofing Demand is Driven by Replacement
Asphalt Dominates the Roofing Market
USD Appreciation on Composite Revenue
Indicators to Forecast Roofing Revenue
Insulation Demand is Raised by Recovering Housing Market
Insulation Capacity Forecast
Indicators to Forecast Insulation Revenue
Industry Overview Valuation
DuPont Analysis
DCF Assumptions
Capacity Expansion in Fiberglass industry
2005-2011 2012-2018(f)$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
3.6
1.1
0.3
1.3
Expenditure on Capacity Addi-tions/Rebuilds
Additions Rebuilds
Bill
ions
Chinese competitors expanded capacity most
aggressively
Expansion will be constrained because of
1. Credit tightening in Chinese financial
market
2. Increasing production costs in China
3. Chinese competitors have been loaded
with high debt
Revenue driven to profitability driven
16
1Q
12
4Q
12
1Q
13
3Q
13
4Q
13
1Q
14
3Q
14
4Q
14
1Q
15
3Q
15
4Q
15
1Q
16
$400,000,000
$425,000,000
$450,000,000
$475,000,000
$500,000,000
80
90
100
110
120
130
Composite Sales U.S. Dollar Index
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
0%
3%
6%
9%
12%
15%
10%10% 10%
11%
5%
7%
2%
5%
2%
7%
5%
8%
6%
7%7%
11%13%
13%12%
10%
Operating Margin
USD Appreciation on Composite Revenue We expect strong dollar to reduce the
global revenue
Improving capacity utilization will enable
producers to charge a higher markup that
compensates the loss in revenue
17
Asphalt Components Metal Tile Other0%
20%
40%
60%
80%69%
14%10%
5% 2%
Shingle Market by Materials
Asphalt Tile Metal Wood Composite Slate$0
$10,000
$20,000
$30,000
$40,000
$9,000
$16,000 $18,000 $18,000$21,000
$29,000
Average Installation Cost
Asphalt Dominates the Roofing Market The durability and cost effectiveness
make asphalt shingles the top choice for
consumers
We do not forecast a change in its
dominance in the roofing market
18
Leaks
Old
Weather Damage
Upgrade Appearance
Deteriorating
Other
0% 10% 20% 30% 40%
33%
33%
14%
11%
7%
2%
Re-roofing Demand Breakdown
17%
33%
50%
Roofing Demand Breakdown
New Construction
Residential Re-roofing
Non-Residential Re-roofing
Re-roofing demand accounts for 83% of
the North American Market
88% of re-roofing demand is driven by
necessary replacement such as leaks,
aging, weather damage, and deteriorating
Demand is Driven by Replacement
19
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
$0
$200,000,000
$400,000,000
$600,000,000
$800,000,000
-10%
0%
10%
20%
30%
40%
Roofing Sales New Housing Starts (YoY) Existing Home Sales (YoY)
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
-30%
-20%
-10%
0%
10%
20%
30%
-5.0%
-2.5%
0.0%
2.5%
5.0%
7.5%
Roofing Sales YoY (Left)Disposable Personal Income YoY (Right)
Indicators to Forecast Roofing Revenue Since roofing is an expenditure for
durable goods, we believe personal
income to be a reliable predictor of roofing
sales but the correlation coefficient is still
low at 0.26
The correlation coefficient is 0.01 with
new housing starts and 0.18 with existing
home sales
20
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
$0
$100,000,000
$200,000,000
$300,000,000
$400,000,000
$500,000,000
$600,000,000
-10%
0%
10%
20%
30%
40%
$331,000,000
$340,000,000
$384,000,000$413,000,000
$330,000,000
$415,000,000
$431,000,000
$466,000,000
$355,000,000
$447,000,000
$454,000,000
$490,000,000
$379,000,000
$451,000,000
$502,000,000$518,000,000
Insulation Sales New Housing Starts (YoY) Existing Home Sales (YoY)
Demand Raised by Recovering Housing Market
Owens Corning forecast capacity
utilization to climb above 90% on 1.1
million new housing starts in the U.S.
We expect revenue and margin in the
insulation segment to expand given a
12% growth in new housing starts
21
100000 150000 200000 250000 300000 350000$250,000,000
$350,000,000
$450,000,000
$550,000,000
R² = 0.65510000002875
New Housing Started vs Owens Corning Insulation Sales
10,00
0,000
11,00
0,000
12,00
0,000
13,00
0,000
14,00
0,000
15,00
0,000
16,00
0,000
17,00
0,000
$250,000,000$300,000,000$350,000,000$400,000,000$450,000,000$500,000,000$550,000,000
R² = 0.505695238870107
Existing Home Sales vs Owens Corning Roofing Sales
Mill
ions
Indicators to Forecast Insulation Revenue Owens Corning’s quarterly insulation
sales have a correlation coefficient of 0.81
with new housing starts and 0.69 with
existing home sales
The statistics are consistent with the
belief that insulation demand is driven by
new construction
22
DuPont Analysis ROE has been driven by a mix of improved margins and asset turnover
Financial leverage is expected to decrease by 37bps as total shareholder equity growth outpaces total assets and debt
ROE Break Down 2013 2014 LTM 2015(f) 2016(f) 2017(f) 2018(f) 2019(f)Net Profit Margin 3.9% 4.3% 4.8% 5.0% 6.4% 6.9% 6.4% 6.2%
Asset Turnover 69.2% 69.8% 71.1% 72.0% 72.5% 72.1% 72.7% 73.6%
Financial Leverage 2.00x 2.03x 1.99x 2.03x 1.91x 1.83x 1.73x 1.65x
ROE 5.3% 6.1% 6.7% 7.4% 8.9% 9.1% 8.1% 7.6%
23
DCF Assumptions2015(f) 2016(f) 2017(f) 2018(f) 2019(f)
CompositeSales (% growth) 4.3% 4.3% 4.3% 4.3% 4.3%EBITDA (% sales) 15.9% 17.5% 15.9% 14.9% 14.9%D&A (% CAPEX) 65.0% 65.0% 70.0% 75.0% 80.0%Capital Expenditure (% sales) 11.4% 11.4% 7.7% 7.7% 7.7%Tax Rate 6.6% 6.6% 6.6% 6.6% 6.6%
InsulationSales (% growth) 7.0% 7.0% 7.0% 7.0% 7.0%EBITDA (% sales) 13.0% 15.0% 15.0% 15.0% 15.0%D&A (% CAPEX) 93.5% 93.5% 93.5% 93.5% 93.5%Capital Expenditure (% sales) 6.5% 6.5% 6.5% 6.5% 6.5%Tax Rate 6.6% 6.6% 6.6% 6.6% 6.6%
RoofingSales (% growth) 3.9% 3.9% 3.9% 3.9% 3.9%EBITDA (% sales) 16.0% 17.0% 18.0% 17.0% 16.0%D&A (% CAPEX) 132.4% 122.4% 112.4% 102.4% 92.4%Capital Expenditure (% sales) 1.3% 1.3% 1.8% 2.3% 2.8%Tax Rate 6.6% 6.6% 6.6% 6.6% 6.6%
24
DCF AssumptionsComposite Insulation Roofing
Cumulative Present Value of FCF $473.8 $624.3 $1013.2WACC 6.76% 5.1% 7.7%Terminal ValueFCF at the End of the Forecasting Period $345.8 $357.0 $329.1Exit Multiple 8.5x 6.8x 6.3x
Terminal Value $2951.7 $2421.0 $2075.0Discount Factor 0.72 0.78 0.69
Present Value of Terminal Value $2128.4 $1883.2 $1433.4% of Enterprise Value 81.8% 75.1% 58.6%
Enterprise Value $2602.2 $2507.5 $2446.6
Implied Equity Value and Share PriceEnterprise Value $7,556.3Less: Total Debt 2,000.0Less: Preferred Securities -Less: Noncontrolling Interest 39.0Plus: Cash and Cash Equivalents 67.0
Implied Equity Value $5584.3Fully Diluted Shares Outstanding 116.6
Implied Share Price $47.90 in millions, except per share data
25