What happened
Shares of Owens Corning (OC -0.39%) dropped as much as 14% today after the company announced second-quarter 2018 earnings. The manufacturer of roofing materials, building insulation, and composites delivered a relatively solid performance compared to the year-ago period, with revenue up 14% and net income up 26%.
Despite strong year-over-year growth, quarterly earnings per share of $1.09 fell well below Wall Street's expectations for $1.45, according to data compiled by Yahoo! Finance. As of 1:43 p.m. EDT, the stock had settled to a 10.1% loss. Shares have now lost 36% of their value since the beginning of the year.
Image source: Getty Images.
So what
The business isn't necessarily going off the rails, as the stock price might suggest. Rather, Owens Corning is simply facing higher materials costs in 2018 than it has in recent years. Rising crude oil prices are likely the main culprit, especially considering that the roofing segment (dependent on asphalt prices) saw the largest decline in operating margin.
It appears that Wall Street analysts did not factor that into their financial estimates for the business. Consider that the average of all analyst estimates called for second-quarter 2018 EPS of $1.45 and revenue of $1.86 billion. While Owens Corning missed the top-line expectation by less than 2%, it delivered EPS that was 25% lower than expected. The difference in earnings is entirely explained by gross margin.
In the second quarter of 2017, the business enjoyed a gross margin of 25.5%, compared to only 22.9% in the most recent quarter. Although small, the difference cost Owens Corning about $45 million in gross profit in the second quarter of 2018. It turns out that the difference between $1.45 in expected EPS and the $1.09 in actual EPS is $40 million in net income.
Now what
Shares of Owens Corning just can't catch a break from Wall Street lately. While management admits the business is facing higher material costs, the expectation is for the business to pick up momentum in the second half of 2018 and carry that forward into 2019. In fact, the company could capture up to 72% of all earnings before income taxes for the year in the back half of 2018 (when home construction and maintenance peaks). Simply put, instead of panicking with the rest of the market, investors might consider giving this building stock a closer look.
