Drip Portfolio Report
Monday, August 11, 1997
by Jeff Fischer (TMF [email protected])
and Randy Befumo (TMF [email protected])

ALEXANDRIA, VA (Aug. 11, 1997) -- Jeff was making fun of me last week because I expressed some preliminary interest in OWENS CORNING (NYSE: OWC). The largest manufacturer of fiberglass in the world, the company does not pass two of Jeff's major investment criteria -- no debt and a fast-growing business. In order to understand Jeff's preliminary objections and really refute them, we first need a decent sense of what Owens Corning is and how the "economics" of its businesses work. Full disclosure -- I have made no decision yet as to what I think about Owens Corning other than it looks cheap and deserves further study. You, dear reader, get to make this journey with me.

Toledo, Ohio-based Owens Corning is the world's largest producer of that ubiquitous wonder material of the late 20th century, fiberglass. Fiberglass is a product that has multiple applications, ranging from forming the outer surface of boats to being spun into pink home insulation. Lightweight, durable, and waterproof, fiberglass is used to replace wood or metal in the design of almost any product. Based on its involvement in the homebuilding market through its insulation business, Owens-Corning has acquired a number of complementary building materials businesses over the years. The company divides itself into two fiberglass dominated divisions -- Building Materials, focusing on the homebuilding and home repair market, and Composite Materials, which focuses on selling composite materials made with fiberglass for everything but insulation.

Rather than simply focus on fiberglass, under the stewardship of ex-General Electric manager Glen Hiner the company has embraced something called "systems thinking." Instead of viewing itself as a company that provides components to other companies, Owens Corning views itself as a company that supplies solutions, or "systems," to people who are either building homes or improving them. Over the last With this in mind, over the last two years Owens Corning has made a number of acquisitions in order to increase its ability to provide everything necessary for a roof, walls, or various other parts of a house. For instance, the acquisition of vinyl siding manufacturer Fibreboard was driven by this goal.

What initially attracted me to the company was that the valuation was rather low for a company in the S&P 500 -- an index the media keeps trying to convince investors is the subject of a mania. With $4.81 in earnings per share (EPS) over the past four quarters and a share price of only $42 15/16 as of the market close today, Owens Corning certainly has not benefited from the flow of money into index funds over the past few years. The price/earnings (P/E) ratio, a measure of a company's price relative to its earnings, is only 8.9 while the rest of the S&P 500 is trading at approximately 23 times trailing earnings. (Trailing is a term used to describe earnings in the last four quarters, or the four quarters that "trail" the current one.) The company even has a 0.60% dividend yield.

Despite these positive characteristics, things are not all sweetness and light at Owens Corning. The company's biggest problems include still outstanding abestos liability and a massive debt load -- a debt load that is partially the remnant of the company defending itself against a leveraged buyout in the '70s and partially driven by the fact that the company has used cash for its acquisitions rather than using stock that it views as undervalued. The debt is not trivial as it amounts to $31.69 per share in long-term debt -- partially explaining the rather low valuation. If you consider the long-term debt part of the company's current share price by adding the $31.69 to the current $42 15/16 share price, the price/earnings ratio increases to to 15.5.

TOMORROW: More on Owens Corning

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