Saturday, November 11, 2006

Quick Valuation - Owens Corning (OC)

Owens Corning recently emerged from Chapter 11 with a rights offering backstopped at $30 a share. Owens Corning is a leader in the building materials industry, supplying glass fibre and insulation products for residential and commercial applications. Over the last two weeks the shares traded as low as $26 dollars and are now currently trading close to $29. I'm interested in this company because it's a situation very similar to that of USG's. I'm hoping to apply what I learned from the USG valuation to value Owens Corning.

Looking at the company's most recent 10-Q balance sheet, the situation looks misleadingly bleak. It had over $8 billion in shareholder equity deficit. This number however is most likely not up-to-date. I think a majority of the deficit has been nullified with the recent re-structuring: cancellation of the old shares, creation of the new shares, rights offering of new shares to creditors, bond holders, etc, and creation of the 524g Trust. If I assume all the $13.5 billion "liabilities under compromise" are replaced by the new liabilities listed in the 10-Qs restructuring notes, I get a company that has a slight shareholder equity deficit. I am not sure if my calculations are correct, so I have contacted investor relations to clarify.

The old shares of the company are now cancelled. Shareholders receive rights to buy the new stock at $45.25 dollars. This price is far from the current price, so I will not factor this into my calculation of the current number of new shares outstanding. Reading through the 10-Q, there are 27 million shares given to bondholders, 72.9 million share rights offering, 3.3 million shares distributed to directors, and 28.2 million shares contingent on the failure of the FAIR Act. The total number of outstanding shares is then 131.4 million, assuming the FAIR Act does not get passed. In the 10-Q, OC management wrote that they believe the likelihood of passing the FAIR Act is fairly slim. I imagine this to be the case too with the new mostly Democrat Congress.

The free cash flow of the company for 2005 was $463 million. Since this free cash flow number occurred during potentially one of the best years for building material suppliers, I don't see this as sustainable. The growth rate over the last five years appeared to be around 15% and projecting that into 2006 gives an estimated best-fit free cash flow of $287 million. Using this value, a 12% discount rate, and assumed 10%/5%/3% staged growth, I get an instrinsic value of $35 for the shares. At current prices around $29, there is a margin of safety of 17%.

At this point, I have made too many questionable assumptions for me to reliably use my IV estimate. I would like to wait for a cheaper price and more information before I re-evaluate whether or not to buy these shares.

22 Comments:

Anonymous Anonymous said...

Love the blog - any update on OC yet?

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Blogger wcsinvestor said...

Thanks for the kind comment. I emailed OC's Investors Relations with a few questions, but have not heard back from them. As of right now, I am sticking with USG as my asbestos play. I've written a put option in hopes of attaining more shares close to $46.

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