Drip Portfolio Report
Wednesday, August 13, 1997
by Randy Befumo (TMF [email protected])

ALEXANDRIA, VA (Aug. 13, 1997) -- Yesterday, we identified five clear issues that need to be examined before we consider OWENS CORNING (NYSE: OWC) as an investment possibility. In an effort to keep the Drip Portfolio an educational vehicle that walks investors through every step of the investment analysis process rather than just casually throwing out decisions for people to mindlessly duplicate, I will explore these issues over the next few days in between Jeff's glowing reports on Coca-Cola. Because one major goal of the Drip Portfolio is to have people learn more about investing as they invest in DRPs so one day they can move on to managing a larger portfolio at a brokerage when they have enough money, I view it as incredibly valuable to detail the entire investment process. For those who find it a little drawn out or slow, I apologize. Hopefully by next week, Jeff and I will agree on which of his ideas to purchase first.

Owens Corning Question #1: Asbestos Liability

The term "asbestos" refers to a family of naturally occurring minerals found in serpentinite and other metamorphic rock. Because this substance is highly resistant to heat, a number of manufacturers historically used it in insulation and fireproofing in buildings. Unfortunately, when breathed asbestos can cause lung diseases ranging from lung cancer to mesothelioma. As there is no "safe" exposure to the natural substance, any company that used asbestos for buildings where the asbestos fibers got into the air currently faces long-standing litigation for the damages caused.

Although it has not been a major story in recent years, the building materials industry -- including Owens Corning -- faces billions of dollars in potential liability claims arising from their use of asbestos. Companies that were involved in manufacturing asbestos are currently liable for injuries the substance caused thousands of people all over the world. As a cautionary measure, many of the companies involved in asbestos litigation have taken sizable charges to build up reserves to pay out the claims. In addition, these companies have successfully sued their insurers and forced many of them to make good on their policies, mitigating some of the financial damage.

Asbestos claims recently made the news on June 25 when the Supreme Court affirmed a Third Circuit Court of Appeals decision to nullify a global settlement involving twenty asbestos companies. The companies had petitioned the court to certify all asbestos litigants as a single class in order to let them work one settlement and administer it through one bureaucratic entity. Although the asbestos claimants do not meet the class standards for trial, the companies argued that Rule 23 of the Federal Rules of Civil Procedure allowed for a different set of criteria for class certification for settlement purposes.

Because the Fifth Circuit Court of Appeals had upheld a similar class certification for recent Owens Corning acquisition Fibreboard, many thought that the settlement was a done deal. However, the Supreme Court upheld the Appeals Court decision to deny this certification on the grounds that the certification decision must be made as if the claim were being litigated and not just being settled. This ruling means that asbestos companies and their claimants must go back to the drawing board to figure out how to settle all of the outstanding claims. While this probably scuttles hope of a mass settlement, we can look at the individual cases pending against Owens Corning and attempt to figure out how they might affect the company.

All of the claims against Owens Corning related to the manufacture of asbestos-containing calcium silicate in high temperature insulation products -- a business the company discontinued in 1972. As of June 30, 1997, Owens Corning had 165,700 personal injury cases pending, 16,700 of which were filed in the first six months of 1997. The company has settled 192,100 cases since the litigation began at an average cost of $10,300 per case. Assuming some of these cases were settled far enough back that it dilutes the average cost and applying a $15,000 per case value, the potential outstanding liability is approximately $2.485 billion. With a total reserve of $1.785 billion and insurance coverage of $490 million, it would appear that there is only $210 million in current liabilities uncovered. Given that the company has 7% net margins and a couple of billion dollars in revenue, this uncovered risk seems relatively minor.

Some investors may not want to invest in Owens Corning because of the involvement with asbestos. Although I do not agree with this position, I find it reasonable. The reason I do not agree, incidentally, is because more than half of corporate America has had exposure to a similar problem at some point, although many of them are more securely in the remote past. Should we hold DuPont accountable for its decision during World War I to sell components used to make chemical weapons? If the company has admitted liability and sought to settle the claims, it passes my test of corporate stewardship. Other investors may want to depart company in considering Owens Corning at this point, however, or do more research as to whether the company has behaved in a manner consistent with their beliefs.

--Randy Befumo, Fool

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