Owens Corning - Final

CFA Institute Research Challenge
Hosted by
Local Challenge CFA Societies of Dayton, Cincinnati and Columbus
The Ohio State University

January 18, 2016
CFA Research Challenge
1 | P a g e
OWENS CORNING (NYSE: OC)
Essentials
Positioned for Growth Through a Strong Strategic Global
Presence
Restructuring and Cost Cutting are major keys to future success.
OC went through an organizational restructuring in 2015, separating its
Building Materials segment into Roofing and Insulation, resulting in a
1.35% decrease in COGS. These savings are expected to be maintained
going forward. The firm has also shuttered inefficient composites
plants in Japan and China, lowering operating leverage and boosting
profitability. EBIT margins grew 1.57% (7.9% to 9.5%) in the last
twelve months and we forecast a peak at 11.7% in 2017.
Initiate OC with a BUY Rating and a Target Price of $50.48. Our
target price is based off a five-year Sum of Parts (SOP) DCF, Pro-
forma Financial Statement DCF, and Relative Valuation; because of
OC’s diverse segments and areas of operations. Given the spread of its
products and operations, we see OC well positioned to capitalize on its
economies of scale with industry demand, and is currently
undervalued by 18.61%.
OC holds leadership positions in all three industries it competes
within: Composites (35.2% of total revenue), Roofing (33.2%), and
Insulation (31.6%). Within the Insulation industry, OC PINK® has a
70% brand recognition among consumers, allowing OC to charge a
premium at the retail level. Brand recognition has spilled over into sales
of OC’s other business lines. Discounts on roofing products have
decreased, indicating a strong ability to dictate pricing in the roofing
segment.
Owens Corning’s operations are highly sensitive to global
economic cycles. It is especially sensitive to the US housing market as
it derives 59.7% of its earnings from North American construction
and remodeling activity.
Share Performance
500
1,000
1,500
2,000
2,500
$20.00
$30.00
$40.00
$50.00
01/02/10 01/02/11 01/02/12 01/01/13 01/01/14 01/01/15 01/01/16
OC Daily Price (Left)
S&P 500 (Right)
Financial & Valuation Metrics (in millions except per share values)
Quick Ratio 0.9 x ROA (LTM) 4.2% Dividend Yield (ttm) 1.4%
Total Debt / Capital 34.6% ROC (LTM) 5.3% UFCF Margin (LTM) 8.2%
EBITDA / Interest Exp. 7.4 x ROE (LTM) 6.7% Price / Book 1.5 x
Altman Z Score 2.0 ROIC (LTM) 7.3% Price / Sales 1.03
Year 2013A 2014A 2015E 2016E 2017E 2018E 2019E
Revenue $5,295.0 m $5,276.0 m $5,503.6 m $5,754.5 m $6,018.8 m $6,297.1 m $6,590.5 m
EBIT $428.0 m $417.0 m $539.2 m $652.3 m $698.4 m $672.2 m $668.7 m
Net Income $171.0 m $205.0 m $276.0 m $367.5 m $371.8 m $360.6 m $365.3 m
NOI Margin 3.2% 3.9% 5.0% 6.4% 6.2% 5.7% 5.5%
EBIT Margin 8.1% 7.9% 9.8% 11.3% 11.6% 10.7% 10.1%
EPS (US$) $1.71 $1.91 $2.37 $3.19 $3.27 $3.22 $3.30
EPS Growth (YoY) N/A 11.7% 23.9% 34.9% 2.5% (1.7%) 2.7%
Number of Shares 119.1 m 118.3 m 116.6 m 115.1 m 113.6 m 112.1 m 110.6 m
Total Debt $2,024.0 m $1,991.0 m $2,003.7 m $2,007.6 m $2,095.2 m $2,090.8 m $2,176.0 m
Rating BUY
Industry
Sector
Adj. Beta 0.93
Debt Rating BBB -
Dividend Yield (ttm) 1.6%
EPS 2015E $2.40
3 Month Average Volume
P/E (ttm) 19.8 x
EV/ EBITDA (ttm) 8.64
Price - (January 15, 2016) $42.56
Target Price (US$) $50.48
52- week price range
Market cap. (US$ m) $4,961.9
Enterprise value (US$ m) $7,556.3
$36.71 - $48.50
Building Products
NYSE: OC
Industrial
1,505,260
Method Valuation
SOP $47.90
Pro-Forma Financial Statement DCF $45.88
Relative Valuation $57.67
Average $50.48
Target Price

January 18, 2016
2 | P a g e
BUSINESS SUMMARY
Since its inception in 1938, Owens Corning (NYSE: OC) has provided innovative glass fiber
material solutions made in plants ranging from its world headquarters in Toledo, Ohio to its
Thermal and Acoustical Insulation plant in Guangzhou, China. Today, OC enjoys leadership
positions in all its industries, operates in 26 countries, and employs over 15,000 people. In the first
three quarters of 2015, the firm generated net sales of $4.08 billion across three segments:
Composites (35.2% of total revenue), Roofing (33.2%), and Insulation (31.6%). The Building
Materials Group was eliminated and split into the Insulation and Roofing segments in 2014 to
streamline management and cut company costs by $9 million. OC filed for bankruptcy in 2000 as a
result of 243,000 asbestos-related claims against the company. The company emerged from
bankruptcy in 2006 with an investment grade bond rating and has since maintained a strong balance
sheet with ample liquidity ($1.8 billion in current assets as of 3Q15). OC currently has a net debt to
total equity of 51.89%, which is in line with their five-year average of 51.17%. In addition to $600
million and $400 million in senior notes with 2022 and 2024 maturities, respectively, OC has access
to $800 million in senior revolving credit.
OC’s PINK® insulation products, with the Pink Panther™ as its mascot, achieve a brand recognition
rate of 70% among consumers. This has created success in the retail home center channel, through
distributors such as Home Depot and Lowe’s, causing a spillover in brand recognition across all
three business segments. OC operates the broadest asphalt plant network in the industry, consisting
of 14 roofing manufacturing sites and 16 shingle production lines. This, combined with OC’s vast
distribution network and proprietary fiberglass composites knowledge, allows OC to serve regional
markets across the nation very cost effectively.
The firm grew its quarterly dividend payout from $0.16 per common share in 2014 to $0.17 per
share in 2015 and has reaffirmed its commitment to maintain dividends through the next business
cycle. OC is expecting FYE 2015 EBIT to be between $460 to $500 million due to increases in
volume and improvements in pricing as a result of estimated US housing starts of 1.1 million in
2015. Corporate and interest expenses for 2015 are estimated to be $110 million each while CAPEX
are expected to be $380 million due to the construction of a non-woven composite plant in
Gastonia, North Carolina.
MANAGEMENT AND GOVERNANCE
OC’s management has been the backbone behind the company’s growth and increased profitability.
Acting as CEO since 2007, Michael Thaman has extensive knowledge of OC and its operations.
Thaman joined OC in 1992 and has since worked in a variety of positions ranging from President
of the Engineered Pipe Systems Business in 1997 to CFO in 2000. Other key executives, such as
Brian Chambers and Julian Francis, have helped spur growth and greatly increase efficiency.
Additional details about these executives and other key management can be found in Appendices 1,
2a and 2b.
In January 2016, OC has been recognized by Chief Executive, ranking 11th on their “2016 Best
Companies for Leaders” for their extensive leadership development efforts. The magazine cited
OC's efforts to make “a concerted effort to really invest more time, energy and dollars in [their]
leadership program”. They were the only company in the building products sector to be honored.
By growing organically, OC fills middle and senior management positions with tenured employees
more likely to be positively motivated and retained.
OC’s board operates across five committees: Audit, Compensation, Governance & Nomination,
Executive, and Finance. Board members serve three-year terms and have elections staggered into
three tiers of expiration, making any attempted hostile takeover unlikely. Some of OC key corporate
governance strengths are:
Shareholder Rights - Focusing on shareholder’s opinion and value maximization, OC
implemented a “say-on-pay vote” in 2014 that allows investors to veto excessive executive
compensation.
Board Oversight – OC’s board oversight is led primarily by the Governance &
Nomination Committee. This committee relies on board assessments that aim to evaluate
each of the other committee’s performance as well as to identify potential issues the
committees may face.
Figure 1:
Source: Company filings & team estimates
35.2%
33.2%
31.6%
Revenue Breakdown by Segment
Composites Roofing Insulation
Figure 2:
Source: Company filings & team estimates
$5000
$5500
$6000
$6500
Total Revenue ($ in millions)
Figure 3:
See Appendix 3 for additional details
Source: Team analysis
Strengths
Opportunities
Weaknesses
Threats
Owens Corning SWOT Analysis

January 18, 2016
3 | P a g e
Board Composition - According to EY, the average level of independence among mid-
cap boards was 80%. This means the OC board, at 92%, is more independent than the
average mid-cap board.
Executive Compensation - OC utilizes Meyer & Partners compensation consultants to
assist in setting executive compensation. As a result, 84% of CEO and 73% of NEO
compensation is linked to a performance target.
BUSINESS SEGMENTS
Composites Segment
The Composites segment produces glass fiber products used to reinforce and improve the strength
and stiffness of other materials. Composites are stronger and/or lighter than traditional materials
such as wood and steel. OC manufactures glass strands which are used in nearly 500 glass fiber
products with over 40,000 end-use applications. These products serve seven primary markets:
transportation, electronics, marine, infrastructure, wind-energy generation, insulation, and roofing
(See Table 1 and Figure 4). OC plans to bring a new facility in Gastonia, NC online in 2016.
According to Steven Vermeulen, Vice President and Managing Director of Engineered Solutions,
“building a new site is a great opportunity for us to install the newest, most advanced manufacturing
technology” and that “with our Gastonia plant, we’ll be able to meet the growing demand for
Sustaina® non-woven products”. These bio-based products are used in building applications, such as
vinyl flooring and ceiling backings, and represent a growing product segment.
Table 1:
Main Composites Solutions Primary End Markets
Chopped Fibers Transportation, Automotive, Electronics, and Appliances
Continuous Fibers Infrastructure (ex. Power & energy)
Fabrics Wind energy, Defense, Aerospace, and Recreation
Mats Roofing Shingles
OC Composites currently ranks #1 in market share in the Americas and Europe with 46% and 30%
of market revenues, respectively (See Figure 5). The composites industry is stable and growing.
Glass fibers demand has grown at 1.6 times global industrial production growth. Within OC’s
composites segment, 61% of revenues are international followed by 39% of revenues coming from
the US and Canada. Compared to 3Q14, 3Q15 EBIT increased by $29m on strong volume, better
pricing, and manufacturing performance, pushing FYE 2015 EBIT estimates to exceed FY2014 by
$80m.
OC’s composites business utilized a growth strategy consisting of: cost leadership, price realization,
capital efficiency, and product leadership. As a result:
75% of manufacturing networks operates below average competitor delivery cost.
OC introduced 50 new products in the past 36 months, which are expected to represent
20% of total composites revenue.
Excess inventories were depleted, realizing $60m in accumulated price appreciation since
2013.
OC entered a strategic alliance and long-term supply agreements, allowing for increased
supply availability in exchange for technology.
A strong dollar lowered revenues for facilities in Russia, Europe, and Brazil. However, lower costs
and price increases cancelled out the negative currency effect on EBIT margins. CAPEX are
primarily driven by rebuilding the glass furnaces used in the production process every 10 to 12
years. However, the severity of the financial crisis disrupted the historical norm of rebuilding 30%
of furnaces every four years, resulting in low CAPEX from 2009 to 2012 and unusually high
CAPEX from 2013 to 2016. Management guidance estimates CAPEX will return to pre-crisis levels
in 2016. Taking all of these factors into account, Composites is the most attractive and profitable
segment of OC.
Roofing/Asphalt Segment
OC offers roofing and asphalt solutions for residential, commercial, and industrial use, with
residential repair/remodeling for the US and Canada (74%) representing the most revenue by end
market followed by commercial & industrial use for the US and Canada (16%) and new residential
construction for the US and Canada (10%). They offer three different shingle families: Traditional,
Architectural, and Specialty. Each family has a number of different shingle offerings each with
Figure 4:
Source: Company filings
16.56%
15.95%
14.81%
14.31%
13.55%
12.13%
12.68%
E&E
Construction
Aerospace
Transportation
Wind energy
Pipe & tank
Others
10.0% 12.0% 14.0% 16.0% 18.0%
2017 FYE Composites Shipments
by End Market
Figure 5:
34%
25%
26%
15%
46%
30%
10%
14%
0% 10% 20% 30% 40% 50%
Americas
Europe
China
Rest of World
2017 FYE - Glass Fiber Composites
Revenue by Region
% Owens Corning Revenue
% Market Revenue
Figure 6: Porter’s 5 Forces - Composites
Threats to
Entry
Bargaining
Power of
Suppliers
Bargaining
Power of
Customers
Threat of
Substitutes
Intensity of
Rivalry

January 18, 2016
4 | P a g e
differing wind resistances, algae resistances, warranties, colors, and advantages for different climates.
Every shingle offering fits into the OC Total Protection Roofing System™, which includes
Berkshire® Hip & Ridge Shingles, VentSure® Ventilation Products, Underlayment Products, Starter
Shingle Products, and Self-Sealing Ice & Water Barrier Products (see Appendix 5). This Total
Protection Roofing System™ has helped OC grow their Roofing Components sub-segment at an
11% CAGR.
Roofing demand is primarily driven by the need to replace existing shingles due to age (60m ft2 in
2015), weather related events (28m ft2), and new construction (19m ft2). Historically, OC has
averaged a 16% EBIT margin since 2012 within the Roofing segment, expects margins to remain in
the mid-teens through 2019 and grew EBIT from $58m in the third quarter of 2014 (12% margin)
to $103 million in the third quarter of 2015 (21%) while growing revenues from $200m (14%) to
$213m (15%) from YTD 2014 to YTD 2015 (as of 3Q). These high EBIT margins are due, in part,
to joint product innovation and cooperation with OC's composite segment resulting in low supply
costs. This joint innovation has results in the chopped glass and mat fiber used in roofing shingles.
OC is well positioned to service all channels in the roofing industry, including roofing distributors
like Beacon Roofing Supply, building materials distributors like Prime Source Building Products,
home centers like Lowe’s, and lumberyards like 84 Lumber. Traditionally, OC sees a third of their
roofing volume occur in the first quarter which draws volume from the third and fourth quarters
thanks to seasonal weather patterns. EBIT performance for 2015 is expected to be in line with 2014
($392m). OC has not fully realized the effects of low oil prices due to asphalt price lag. However,
with oil expected to remain low in the near term, we expect to see asphalt depreciation in 2016 and
a lower profit.
Roofing sales from new construction and re-roofing activities represent 20% and 80% of segment
revenues, respectively. New construction sales performed in a predictable way during the economy
recovery, while re-roofing activities underperformed. While economic conditions remain important,
managements claim that weather represents 30% to 40% of re-roofing demand and future demand
could greatly deviate from our expected sales growth rate 7% YoY through 2019. OC is also
expanding into the $2bn roofing components market with its Synthetic Underlayment and Ice &
Water Shield products. Management’s plan for future growth is to maintain a competitive advantage
through a price and cost gap by focusing on the following:
Increasing/maintaining brand recognition
R&D efforts expands across applications in all business segments
Vertical integration
Developing a flexible manufacturing network
Insulation Segment
OC is most notably known for their Pink Panther logo and PINK colored fiberglass-based
insulation products. The PINK brand drives much of OC’s popularity and management believes it
is crucial to maintaining customers. These products are used in commercial, residential, and
industrial applications for acoustic and thermal purposes. OC FIBERGLAS™ 700 Series Insulation,
for example, reduces heat and noise transfers while maintaining the best rating for flame spread.
From 1985 to 2008, OC Insulation achieved an average EBIT margin of 15%. The US housing
downturn caused that margin to drop to a trough of -8% in 2011. Since then, increasing housing
starts has allowed OC to enjoy 17 straight quarters of margin improvement. EBIT margin stands at
12% of sales in the most recent quarter and OC believes it will remain in the double digits for the
fourth quarter of 2015 and all of 2016.
The Insulation segment has the majority of its operations in the US and Canada with residential
new construction, commercial and industrial, and repair and remodel accounting for 40%, 24% and
20% of revenue, respectively (See Figure 9). Growth in these markets are driven primarily by
increasing housing starts, adoption of greener building codes, aging house stock, and urbanization.
In 2005, 2.1 million housing starts led to a 100% utilization of OC plant capacity. Responding to
the drop in demand in the subsequent housing crisis, OC mothballed capacity to decrease fixed
costs. This year, housing starts of 1.2 to 1.4 million have translated to a utilization of 73% of the
current capacity which has required OC to restart the previously mothballed capacity. As the
housing market continues to recover, price realization and increased operating leverage, estimated at
50%, are expected to increase revenue by 10% for the second half of 2015 relative to the same
period in 2014.
Figure 7:
17%
33%
50%
US Roofing Demand Break -
down
New Construction
Residential Re-roofing
Non-Residential Re-roofing
Figure 8: Porter’s 5 Forces - Roofing
Threats to
Entry
Bargaining
Power of
Suppliers
Bargaining
Power of
Customers
Threat of
Substitutes
Intensity of
Rivalry
Figure 9:
40%
24%
20%
16%
0%
10%
20%
30%
40%
50%
New Res.
Construction
Commercial &
Industrial
Repair /
Remodel
International
OC Insulation Sales by End Market

January 18, 2016
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INDUSTRY OVERVIEW & COMPETITIVE POSITIONING
Composites Industry
The global composites market is expected to grow at a 4.3% CAGR1 over the next five years. By
2020, Asia and North America are expected to capture 51% and 29% of market share respectively,
versus 50% and 16% in 2015. Composite materials have diverse applications with aerospace,
automotive, and construction registering the highest estimated CAGR of 10.2%, 8.3%, and 7.5%
respectively through 2019. Their strength, light weight, and relatively low cost make composites
promising alternative tool of steel and wood. Composites industry sales are expected to grow at
1.5x global GDP growth as composites are used to replace these traditional materials.
Fiberglass
Fiberglass is a specific type of composite, comprising of plastic reinforced with glass fiber. The
global market for fiberglass is a $7.5 billion industry that is expected to grow at a CAGR of 5 to 7%
with global shipments growing at 1.6x industrial production growth. OC’s global competitors
include PPG Industries, Johns Manville, Chongqing Polycom International Corp, and several China-
based suppliers. Seeing that fiberglass products have become commoditized with little
differentiation between manufacturers, we believe that pricing is primarily determined by global
production capacity and idle capacity will increase price competition. However, as Chinese
competitors begin to focus on boosting profitability, we have seen slowing capacity expansion
contribute to increases in global utilization rates throughout the industry. From 2015 through 2018,
global utilization rates are projected to rise above 90%. We anticipate this will increase
manufacturers’ ability to fix selling prices and achieve higher operating margins.
OC is the global leader in the glass composites industry with a market share above 30%. Its
dominance in the Americas contributed to 46% of OC Composite revenue in 2014. With only five
plants in Asia, however, OC derives just 10% of its composites revenues from China vs. its
competitors’ average of 26% (Figure 5). The firm is at a disadvantage in this region given that price
and quality are similar among industry players. It is worth noting that a strong dollar will dwindle
revenues generated abroad (Appendix 6) Even so, we forecast the currency effect should not have
material impact on share price given that the rising capacity utilization will enable producers to
stabilize prices and charge a higher markup that compensates for the exchange loss.
Roofing / Asphalt Industry
Roofing was a $20 billion industry in 2015 with residential shingle accounting for 58% of market.
The industry grew at a 4.7% CAGR from 2010 to 2015 due to a recovering housing market and is
expected to grow at a 3.9%2 CAGR through 2017. Since roofing is a mature and saturated industry,
we expect industry revenue will closely track US economic activity.
While sales growth will be constrained by the interest rate hike in the short run, we believe that
roofing demand is delayed rather than cancelled since 83% of the demand is triggered by necessary
repair/remodeling. As a result, we forecast the roofing industry revenue to grow at 3.9% in 2016
despite the recent rate hike by the Federal Reserve. We found that OC’s roofing sales have
correlation coefficients of 0.014 and 0.18 with new housing starts and existing home sales,
respectively, which are not reliable predictors of roofing sales (Appendix 7). Given that shingles are
a durable good, we observe that the disposable personal income on prior half year serves as a better
leading indicator with a correlation coefficient of 0.26 with OC's roofing sales (Appendix 8). We
estimate that OC’s roofing sales will rise by $11m for every 1% increase in disposable personal
income. However, improved design and materials have extended the useful life of newer shingles,
which will affect producers in the long run as replacement cycles are extended.
Asphalt shingles command 55% and 91% share of residential and commercial roofing market which
equates to a 69% overall market share (Figure 12). This leads to substantially lower installation
costs. Shingles of other materials cost 1.7 to 3.2 times as much as their asphalt counterpart.
Although other materials have gained popularity because of their aesthetic value, longer durability,
and cooling effect, we believe that these benefits will not materially change the market share given
their much higher installation cost. We forecast that shipments will rise to 112 million square-feet in
2016 with higher demand resulting from a 16% increase in new construction and a 10% increase in
weather-related events caused by El Niño, increasing extreme rainfall and floods risk in the
Southern US (Appendix 9)
Figure 12:
Asphalt shingles hold a dominant 70% of market share
69.2%
0.0% 20.0% 40.0% 60.0% 80.0%
Other
Tile
Metal
Plastic
Asphalt
Shingle Market by Material
Figure 11:
Other materials are 1.7x – 3.2x as expensive as asphalt
shingles
$9,000
$29,000
$0
$10,000
$20,000
$30,000
Average Installation Cost by Material
1 Lucintel, Growth Opportunities in Global Composites Industry 2015-2020, March 2015
2 Freedonia, Roofing – Industry Market Research, Market Share, Market Size, Sales, Demand Forecast, Market Leaders, Company Profiles, Industry Trends
Figure 10:

January 18, 2016
6 | P a g e
The North American roofing industry is highly consolidated with four major players, in order of
market share: GAF/ELK, Owens Corning, CertainTeed, and Tamko. These four firms represent
more than 90% of the market. Industry operating margins declined in the first half of 2015 as a
result of price competition. These margins are predicted to recover in the second half of 2015 now
that overall production capacity is constrained, leading also to price stability. Buyers tend to take
advantage of OC’s off-season discounts to boost their inventories, as OC shipped an average of
35% of annual sales during 1Q12 and 1Q14. Starting in 2015, OC has eliminated its winter
discounts in order to maintain its gross margin and smoothen its delivery cycle. We believe the
elimination of discounts signals that industry production is near full capacity and that demand is
strong enough for the industry to more strongly enforce pricing.
OC is the second largest manufacturer of asphalt shingles in North America. It generates 73% of its
roofing revenue from residential repair/remodeling. The segment is thus highly exposed to re-
roofing demand. We believe that OC has not fully realized the effects of low oil prices seeing that
asphalt costs have retained a premium above the historical average due do extended lag time. OC is
currently expanding its product portfolio by marketing roofing components, which is an estimated
$2 billion industry and grew at an 11% CAGR from 2009 to 2015 (Appendix 5). Though OC has
increased the attachment rate in roofing applications from $0.20 to $0.25 for every dollar spent on
asphalt shingles, we expect that component sales are hard to increase further since this niche is
already occupied by other producers. These measures lead us to expect 14.3% EBIT margins in
FYE 2015 and 15.4% in FYE 2016.
Insulation Industry
The US insulation market is estimated to grow at a 7.0% CAGR3, reaching $10.4 billion by
2019. With 48% of the market share, fiberglass insulation will maintain its dominance given its low
cost. Residential insulation accounts for 64% of industry demand with 40% of residential demand
resulting from new construction. We attribute recent industry growth to the housing recovery, new
environmental codes that require builders to increase insulation per structure, and greater consumer
awareness of insulation’s role in boosting energy efficiency.
The US insulation industry is highly consolidated with the top three
manufacturers controlling 80% of the market share. OC is the largest player with a market share
above 35%, followed by CertainTeed, Johns Manville, and Knauf. We find that OC can charge a
premium in retail chain stores with its highly recognized PINK brand. (Appendix 10) But we infer
that its brand premium is less valuable to contractors because glass fiber is a commodity and
industry competitors are quick to adjust prices to match OC.
New housing construction is a key driver of insulation demand. Insulation sales have correlations
of 0.81 and 0.69 with new housing starts and existing home sales, respectively (Appendix 11). OC’s
management estimates that demand will increase 200M pounds for every 100,000 housing starts.
OC inferred that the industry will run at a 90% utilization rate on 1.1M US housing starts and will
operate near full capacity on 1.4M to 1.5M housing starts. We project that insulation EBIT margin
can reach 11% in 2016 as the housing starts are expected to grow 12% in next year.
INVESTMENT SUMMARY
We issue a BUY recommendation on Owens Corning with a target price of $50.48 from an equally
weighted average of a Sum of Parts DCF ($47.90), a Pro-Forma Financial Statement DCF ($45.88),
and a Relative Multiples Valuation ($57.67) due to the firm’s diverse operations. Since OC competes
against strong competition in broad industries driven by different factors, the use of three separate
valuation methods more accurately reflects OC’s true intrinsic value from conservative assumptions
in our DCF models weighed against industry competition. We believe OC possesses competitive
advantages and faces risks that the market has not accounted for at the current stock price of
$42.56.
Owens Corning operates in three business segments: Composites, Insulation, and Roofing.
Composites remain the broadest and most attractive segment with over 40,000 end-use applications
including electronics and transportation. Insulation has made the OC brand popular with the
introduction of the Pink Panther™ logo and PINK® colored glass fiber insulation seen in many
residential and commercial units. OC Roofing is driven by demand for shingles in new construction
Figure 13:
87.5% of demand driven by necessary repairs & upgrades
33.1%
32.8%
14.2%
10.9%
7.4%
1.7%
Leaks
Old
Weather Damage
Upgrade Appearance
Deteriorating
Other
0% 10% 20% 30% 40%
Re-roofing Demand Break - Down
Figure 15:
48%
38%
9%
5%
0%
15%
30%
45%
60%
Fiberglass Rigid Foam Spray Foam Others
N. American Insulation Market by
Volume
3
PR Newswire, U.S. Insulation Market to Hit $10.4 Billion in 2019 - Global Insulation Industry 2020 Forecasts in New Research
Reports
Figure 14: Porter’s 5 Force - Insulation
Threats to
Entry
Bargaining
Power of
Suppliers
Bargaining
Power of
Customers
Threat of
Substitutes
Intensity of
Rivalry

January 18, 2016
7 | P a g e
projects but has enjoyed an expansion of the Roofing Component business due to the OC Total
Protection Roofing System™.
A key driver of growth for OC going into the future is their restructuring and cost cutting activities
which have already led EBIT margins to increase from 7.9% to 9.5% (1.57% growth) over the last
twelve months. We forecast this EBIT margin to peak in 2017 at 11.7% and step down to 10.2% in
2019.
Based on our valuation, from 2015 to 2019, we forecast revenues to grow from $5,541m to $6,757m
(22% growth), EBITDA (adj.) to grow from $830m to $1,032m (24.28% growth) and EPS to grow
from $2.40 to $3.81 (59% growth). OC has beaten EPS estimates in each of the past four quarters
(37% average beat) and has returned 36% year-to-date.
In 1Q14, OC announced a quarterly dividend of $0.16 per share which, as of 1Q15, has been
increased to $0.17 per share. OC has fully integrated their acquisition of Thermafiber and has
announced the construction of a new facility in Joplin, Missouri to support growth in the insulation
market. Further, OC will be opening a new facility in Gastonia, North Carolina in 2016 which will
help meet growing demand for Sustaina® non-woven products. OC was recently ranked 11th on the
“2016 Best Companies for Leaders” list, according to Chief Executive magazine. The list consists of
40 public companies and recognizes global leaders in leadership development.
VALUATION
3Q15 Results
OC reported 3Q EPS of $0.96, beating consensus estimates of $0.68 by 41%, as well as beating
analyst expectations by 37.07% over the last four quarters. Firm-wide LTM EBIT reached $506m
and management guidance suggests that FYE 2015 EBIT will be in the range of $460m to $500m.
Relative Valuation
Our relative valuation of $57.67 is derived from the comparable companies median LTM
EV/EBITDA multiple of 9.37x.
Discounted Cash Flow Assumption
For the SOP we used the pure play approach to find each operating segment's respective beta
shown in Figure 16. OC has a weighted average after tax cost of debt of 2.1%, which we held
constant for each segment. As a result of recent market activity the separated segments yielded a
higher WACC then the collective firm (figure 17). For each segment’s estimated enterprise value we
used the exit multiple method (EMM); where each segments multiple was the median LTM
EV/EBITDA multiple of their respective comparable companies. OC's large deferred tax assets
balance will keep the effective tax rate at 6.6% through 2019. We held the NWC components at the
historical median; as Owens Corning maintains relatively stable levels of NWC (figure 18).
Table 2:
NWC ($ in millions) 2015E 2016E 2017E 2018E 2019E
(Increase) / Decrease ($24.8) ($37.7) ($39.6) ($41.7) ($43.9)
Furthermore, we allocated firm wide NWC across each segment proportional to total revenue when
forecasting each segments’ FCF. For the future CAPEX and D&A we used management guidance
and historical trends; CAPEX as a percentage of sales, and D&A as a percentage of CAPEX are
shown in Figure 19.
Sum of Parts DCF
Appendix 12 fully displays our SOP DCF and the implied share price of $49.70. Revenue growth
rate is tied to global industry growth expectations for composites and domestic industry growth
expectations for roofing and insulation, growing at a CAGR of 4.3%, 3.9% and 7.0% respectively
between 2015 and 2019. Helping drive OC's roofing revenue is the rapid growth of the component
products, which has seen an 11% YoY growth in revenues. Component products have boosted the
attachment rate from $0.20 to $0.25 for every dollar spent on asphalt shingles. These measures lead
us to expect 14.3% EBIT margins in FYE 2015 and 16% in FYE 2017, in roofing. With insulation
yielding 70% brand recognition among home owners, OC has been able to grow residential demand
steadily since 2012, as well as increasing price by $125m. Moreover, energy efficiency efforts have
driven residential insulation demand, with 30% more light density insulation used in construction
Figure 16:
Median Segment Beta
Composites 0.68
Insulation 0.43
Roofing 0.83
Firm-Wide Beta
Owens Corning 0.93
Levered Beta
Figure 17:
Segment WACC
Composites 6.76%
Insulation 5.15%
Roofing 7.68%
Firm-Wide WACC
Owens Corning 7.40%
Firm & Segments Adj. WACC
Figure 19:
Segment CAPEX (% of Sales)
Composites 11.4%
Insulation 6.5%
Roofing 1.3%
Segment D&A (% of CAPEX)
Composites 65.0%
Insulation 93.5%
Roofing 132.4%
2015 FYE - CAPEX AND D&A
Figure 18:
NWC Component Historical Median
Days Sales Outstanding 47.1 x
Days Inventory Held 69.3 x
Prepaids and Other CA (% of sales) 4.45%
Days Payable Outstanding 46.1 x
Other Current Liabilities (% of sales) 8.36%

January 18, 2016
8 | P a g e
than in 2006. Based on current economic expectations, we expect insulation revenues to grow at 7%
through 2019.
We expect composites CAPEX to be 7.7% of sales from 2017-2019, based on pre-crisis averages.
3Q revenues were up 12% YTD, due to demand growth and price increases. As a result, we see
FYE 2016 EBIT margins of 10.1%, peaking at 10.5% before stepping to 8.7% as D&A normalizes.
We expect insulation CAPEX to remain constant at the historical median of 6.5% of sales, as no
major projects have been announced. OC’s insulation business had a LTM EBIT margin of 6.2%,
with the expectation of reaching 10% EBIT margins by 2016.
Pro-forma Financial Statement DCF
To better estimate total firm performance, we did a pro-forma for the Income Statement, Balance
Sheet and Cash Flows Statement (shown in appendix 13a,b,c,d), followed by a DCF from the
forecasted values tables 3a and 3b show the implied share price sensitivity between the EMM and
PGR. The assumptions used in the SOP where aggregated for the pro-forma. We estimated that as
OC's cash grows, management would increase the dividend payout ratio from the LTM rate of
30.76% to 35% in 2019. Values that were not estimated above were held constant.
When calculating the implied share price, we took the average enterprise value given between the
EMM and the perpetuity growth method (PGM). For the EMM we used the median EV/EBITDA
multiple of 7.22x and for the PGM we assumed a rate of 3.3%, the IMF estimated global growth
for 2015. With a firm wide WACC of 7.4% (see figure 17) our implied share price was $45.88.
FINANCIAL ANALYSIS
2014A 2015E 2016E 2017E 2018E 2019E
$5,276.0 m $5,541.9 m $5,822.1 m $6,117.6 m $6,429.2 m $6,757.8 m
$716.0 m $830.3 m $961.1 m $994.0 m $1,001.7 m $1,031.9 m
$412.0 m $544.0 m $662.0 m $713.2 m $690.5 m $690.1 m
$385.0 m $508.1 m $618.3 m $666.2 m $644.9 m $644.6 m
$1.91 $2.40 $3.26 $3.71 $3.67 $3.81
118.3 m 116.6 m 115.1 m 113.6 m 112.1 m 110.6 m
18.6% 19.7% 20.2% 20.7% 21.2% 21.7%
13.6% 15.0% 16.5% 16.2% 15.6% 15.3%
7.8% 9.8% 11.4% 11.7% 10.7% 10.2%
3.9% 5.0% 6.4% 6.9% 6.4% 6.2%
2.7% 3.6% 4.7% 5.0% 4.6% 4.6%
7.3% 9.4% 10.7% 10.7% 9.7% 9.0%
5.5% 7.4% 8.9% 9.1% 8.0% 7.6%
47.3 x 47.1 x 47.1 x 47.1 x 47.1 x 47.1 x
68.9 x 69.3 x 69.3 x 69.3 x 69.3 x 69.3 x
46.1 x 46.1 x 46.1 x 46.1 x 46.1 x 46.1 x
Short Term Liquidiy
1.8 x 1.8 x 1.8 x 1.9 x 1.9 x 1.8 x
1.0 x 1.0 x 1.0 x 1.0 x 1.0 x 1.0 x
3.6 x 3.7 x 4.5 x 4.8 x 4.5 x 4.5 x
0.4 x 0.6 x 0.7 x 0.6 x 0.6 x 0.6 x
Long Term Solvency
34.0% 34.2% 32.0% 30.4% 28.5% 27.2%
53.38% 52.79% 47.79% 45.13% 40.89% 37.58%
2.8 x 2.4 x 2.1 x 2.1 x 2.1 x 2.0 x
Shareholder Ratios
27.45% 27.55% 22.94% 27.39% 31.49% 31.00%
$3.19 $3.47 $4.31 $5.04 $4.93 $4.98
EBIT (adj.) Margin
Financial Position
Income Statement ($ mm)
Revenue
EBITDA (adj.)
EBIT (adj.)
NOPAT
EPS
Shares outstanding
Margin and Return Data
Gross Profit Margin
EBITDA (adj.) Margin
Cash Flow to Current Liabilities
Net Income Margin
Return on Assets
Return on Invested Capital
Return on Equity
Activity Ratios
Days Sales Outstanding
Days Inventory Held
Days Payable Outstanding
Current Ratio
Quick Ratio
Interest Coverage Ratio
Net Debt / Capital
Long Term Debt to Equity
Leverage Ratio (Debt / EBITDA)
Dividend Yield
FCFF per Share
Figure 21:
$7,250
$7,500
$7,750
$8,000
$8,250
Total Assets ($ in millions)
Figure 22:
$1600m
$2000m
$2400m
Long Term Debt
Figure 20:
2%
7%
12%
2012 2013 2014 2015E 2016E 2017E 2018E 2019E
EBIT Margin
Table 3b:
$45.88 7.4 x 8.4 x 9.4 x 10.4 x 11.4 x
6.2% 52.27 55.55 58.82 62.10 65.37
6.7% 46.16 49.36 52.56 55.76 58.96
7.4% 39.87 42.97 $46.06 49.16 52.26
7.7% 37.71 40.76 $43.81 46.87 49.92
8.2% 34.60 37.58 40.57 43.55 46.53
8.7% 31.97 34.88 37.80 40.71 43.63
Exit Multiple
DiscountRate
Table 3a:
$45.88 2.30% 2.80% 3.30% 3.80% 4.30%
6.2% 49.67 53.49 58.63 65.90 77.00
6.7% 45.67 48.59 52.37 57.46 64.66
7.4% 41.14 43.25 $45.88 49.23 53.67
7.7% 39.49 41.35 $43.63 46.50 50.21
8.2% 37.01 38.54 40.39 42.65 45.49
8.7% 34.83 36.11 37.62 39.45 41.69
Perpetuity Growth Rate
DiscountRate

January 18, 2016
9 | P a g e
Overview
The financial position table above highlights our expectations of OC's performance through 2019.
Since emerging from bankruptcy in 2006, OC's profitability and operations have seen considerable
volatility, with net income having a standard deviation of $2,691m between 2006 and 2014, and total
assets falling 18% between 2005 and 2010. However, moving forward, we expect net income to
regain stability and grow at 5.7% CAGR as demand and operations normalize. OC's share price saw
a 14.51% return compared to the S&P500's -7.56%.
Cost Cutting Activities Will Amplify Profitability
Management has taken a number of steps to increase profitability since 2006 through eliminating
less desirable assets including:
Organizational restructuring
9 divestures
Optimizing high potential facilities
Shut underperforming facilities
As a result, OC reported 3Q EPS of $0.96, beating consensus estimates of $0.68 by 41%, leading
us to expect firm wide EBIT margins to reach 11.7% by 2017 shown in figure 16.
Positioned Well for Global Growth
OC has been expanding both its production and product lines strategically for future global growth,
aimed at products and geographic locations that will provide the best return. Such products and
facilities include:
A fourth Chinese FIBERGLAS™ facility, which is already posting profits after operating
for two years.
The acquisition and expansion of Thermafiber
Expansion of "Sustainability" products and promotions such as "EcoTouch®"
Further, coupled with OC's share repurchase program and the aforementioned cost cutting
measures, we expect to see unlevered free cash flow per share to grow at a 7.45% CAGR between
2015 and 2019 (shown in figure 24) and EPS to reach $3.81 by 2019, with a CAGR of 9.7%.
Du Pont Analysis: Drivers of ROE
Table 4 shows a breakdown of OC's ROE. OC's ROE growth is driven by the increase in net profit
margin, with a 11.183% change YoY compared to asset turnover and financial leverage at 0.855%
and 1.446% change YoY respectively; resulting in a 13.75% increase YoY in ROE, reaching 6.06%,
shown in figure 26. Future we expected ROE to be driven by increasing net profit margins and asset
turning over, with ROE peaking at 8.92% in 2016 before stepping down to 7.57% in 2019; the
increase in net profit margin can largely be attributed to OC cost cutting efforts. Financial leverage
is expected decreases by 37bps from 2014 to 2019, as total shareholder equity growth outpaces total
assets, and debt (net debt/capital) decreases by 6.9%.
Table 4:
INVESTMENT RISKS
ECONOMIC RISK: Macroeconomic Weakness (ER 1)
The largest risk facing Owens Corning is a global slowdown. OC’s business segments are highly
cyclical. We see significant macroeconomic risks in OC’s three major regions. (See Appendix 14)
Economic activity within the Eurozone remains stagnant: World Bank estimates Eurozone GDP
growth to be just 1.8% in 2016. China is in the midst of grappling with a sharp slowdown in
economic expansion after enjoying decades of tremendous growth. The 18% drop in the Shanghai
Composite Index since January 1 only adds to the uncertainty. With the latest U2 unemployment
rate of 5.0% and a forecasted GDP growth of 2.8% in 2016 by the World Bank, the United States
is one of very few bright spot in the global economy at the moment. However, weaknesses in its
ROE Break Down 2013A 2014A LTM 2015E 2016E 2017E 2018E 2019E
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 1.997 x 2.025 x 1.990 x 2.028 x 1.910 x 1.826 x 1.729 x 1.649 x
ROE 5.33% 6.06% 6.73% 7.36% 8.92% 9.06% 8.04% 7.57%
Figure 23:
-$100
$0
$100
$200
$300
$400
$500
2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Net Income ($ in millions)
Figure 24:
Source: Team Analysis
$3.0
$3.6
$4.2
$4.8
$5.4
2014A 2015E 2016E 2017E 2018E 2019E
Unlevered FCF per Share
Figure 25:
$0.00
$1.00
$2.00
$3.00
$4.00
-10%
0%
10%
20%
30%
40%
2014A 2015E 2016E 2017E 2018E 2019E
EPS & EPS Growth
EPS EPS Growth YoY
Figure 26:
-10%
0%
10%
20%
30%
ROE Break-Down YoY Growth
Net Proft Margin Growth
Asset Turnover Growth
Financial Leverage Growth

January 18, 2016
10 | P a g e
largest trading partners may dampen economic growth in the short to medium term. The S&P 500’s
8.0% year-to-date decline as of Jan 15th reflects the market’s concerns.
ECONOMIC RISK 2: N. Am. Housing Market / Consumer Confidence (ER 2)
OC derives 59.7% of all sales from North America, 77.9% of which is dependent upon residential
construction and remodeling. A slowdown in the housing market or a deterioration in consumer
confidence will have a material impact on the company’s revenue and valuation.
OPERATIONAL RISK: High Operating Leverage/Continuous Production (HOL)
The firm incurs high fixed costs and requires high levels of capital spending regardless of business
activity. In addition, the production process for insulation and composites are continuous in nature
while demand is cyclical. In a downturn, OC will not be able to adjust supply to demand in the
short run.
REGULATORY RISK: Environmental Regulations/Potential Fines (ENVR)
OC has been deemed a Potentially Responsible Party under the Comprehensive Environmental
Response Compensation and Liability Act. In the past, OC was ordered to pay significant
compensatory damages to victims of the company’s asbestos products, contributing to the
company’s bankruptcy in 2000. It is possible for the company to face a similar situation in the
future.
LEGAL/OTHER RISK: OC is a Holding Company (HCO)
OC depends on its subsidiaries for cash to meet its obligations. The ability of OC’s subsidiaries to
pay dividends and other distributions is dependent on their operating results and the laws and
regulations the subsidiaries operate within.
MARKET RISK: Impact of recent oil volatility (MR)
Given the current environment in the oil industry and OC's recent shingle price decreases,
continued decreases in oil prices have translated to lower asphalt costs and maintained margins in
the roofing segment. Historically, OC has seen a three month lag between material oil price changes
and their effect on asphalt prices. Currently, due to asphalt supplier's reluctance to sell at lower
prices, OC is seeing an increase in lag to six months.
Figure 27:
Source: Team Estimates

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11 | P a g e
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the
content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as an officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be
reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information
is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment
advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by
any individual affiliated with CFA societies of Dayton, Cincinnati or Columbus, CFA Institute or the CFA Institute Research Challenge with regard to
this company’s stock.
CFA Institute Research Challenge

January 18, 2016

12 | P a g e

APPENDIX

Appendix 1:

Source: Owens Corning 03/12/2015 DEF 14A filing

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Appendix 2A:


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Appendix 2B:


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Appendix 3:

Source: Company filings, Team Analysis

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Appendix 4: Porters Five Forces

Roofing

Insulation

Intensity of Competitive Rivalry: Low
- Stable competitive environment
Bargaining Power of Customers: High
- Low switching costs
- No long term contracts
Bargaining Power of Suppliers: Low
- No supplier depends on OC for a significant portion of their revenues
- Good relationship with labour unions
Threat of Substitutes: Low to Medium
- Lots of substitutes
- Asphalt shingles by far the cheapest solution
Threat of New Entrants: Low
- High CAPEX required
Intensity of Competitive Rivalry: Medium to High
- Stable competitive environment
- CR4 > 80%, oligopolistic competitive environment
- OC has 35% of the market share
- Brand power – OC PINK
- Innovative products
Bargaining Power of Customers: High
- Wide distribution
- Low switching costs
- No long term contracts
- High brand recognition
Bargaining Power of Suppliers: Low to Medium
- Good relationship with labor unions
Threat of Substitutes: Medium
- Insulation made out of other materials: foam
Threat of New Entrants: Medium
- High brand recognition
- High capital expenditures required
- Economies of Scale in manufacturing; continuous manufacturing process
- Mature but growing
- OC has lots of patents
Threats to
Entry
Bargaining
Power of
Suppliers
Bargaining
Power of
Customers
Threat of
Substitutes
Intensity of
Rivalry

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Appendix 5: Owens Corning Roofing Components

Source: 2015 Investor Day Presentation

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Appendix 6:
U.S. dollar appreciation will put pressure on international sales of composite in the short run.

Source: Company Filings, Federal Reserve

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Appendix 7:

Source: Company Filings, U.S. Census Bureau
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
$0
$100
$200
$300
$400
$500
$600
$700
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15
In $m USD
Roofing Sales New Housing Starts (YoY) Existing Home Sales (YoY)

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20 | P a g e

Appendix 8:

We found Owens Corning’s roofing sales to have a correlation coefficient of 0.26 with prior-half-year disposable personal income.

Roofing sales have only 0.04 and 0.14 correlation coefficient with housing starts and existing home sales.

-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Roofing Sales YoY (Left) Disposable Personal Income YoY (Right)

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Appendix 9: 2016 Demand will be driven by new construction and weather events

Source: Investor Day Presentation, Team Estimate
*OC’s management define “Age” as age of shingles and “Economic Factors” as existing home sales, income growth, and household
formations.

2009 2010 2011 2012 2013 2014 2015(f) 2016(f) 2017(f) 2018(f)
Major Storms 17 6 19 11 6 6 5 6 5 5
Other Weather Events 21 28 31 34 30 23 23 25 24 24
Age & Econ Factor* 71 63 61 59 58 60 60 60 60 60
New Construction 11 11 11 14 17 18 19 22 27 28
Growth (Right Scale) -11.11% -10.00% 12.96% -3.28% -5.93% -3.60% 0.00% 5.08% 2.97% 0.75%
-15%
-10%
-5%
0%
5%
10%
15%
0
20
40
60
80
100
120
140
Growth Rate (%)
Demand in mil. Sq.
Roofing Demand by Source & YoY Growth Rate

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Appendix 10: OC’s Premiums over Competition

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Appendix 10 (Con’t):

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Appendix 11:
Owens Corning’s insulation sales have 0.81 correlation with housing starts and 0.69 with existing home sales.
Housing starts and existing home sales function as good coincident indicators of insulation sales.
Source: Company Filings, U.S. Census Bureau, Federal Reserve
$331 $340
$384
$413
$330
$415
$431
$466
$355
$447 $454
$490
$379
$451
$502
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
$0
$100
$200
$300
$400
$500
$600
Millions
Insulation Sales New Housing Starts (YoY) Existing Home Sales (YoY)
$250
$300
$350
$400
$450
$500
$550
10 11 12 13 14 15 16 17
Millions
Unit in Millions
Existing Home Sales versus Owens Corning
Insulation Sales
$250
$300
$350
$400
$450
$500
$550
100 150 200 250 300 350
Millions
Unit in Thousands
New Housing Started versus Owens Corning
Insulation Sales

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Appendix 12:


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Appendix 12 (Con’t):


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Appendix 13A: Three Statement Valuation

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Appendix 13B:

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Appendix 13C:

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Appendix 13D:

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Appendix 14: Growth is slowing in all of Owens Corning’s major markets.
All Sources from FactSet unless otherwise noted
Europe
Growth in the Eurozone has been sluggish since the
European Sovereign Debt Crisis began in 2009. As the
region’s largest economy, Germany achieved GDP growth
of 1.7% in 2015 and remains the Eurozone’s economic
powerhouse. However, since 4Q of 2014, the five largest
economies in the Eurozone have all shown signs of slowing.
Industrial production has also been slowing in Germany,
France, and the UK. In comparison, Italy and Spain are
enjoying a resurgence in industrial production, albeit from a
low base. Unemployment in both countries remains
persistently high.
Migrant Crisis – the ongoing arrival of refugees on the EU’s
borders are causing significant social and political disruptions.
Although primarily a humanitarian issue, the crisis will have
social significant social and economic effects. Border controls,
for example, have been re-imposed in several countries within
the Schengen Area. This has already had direct economic costs
in the form of delays in the flow of goods.
China
After years of double-digit, investment-led growth, the
Chinese economy is experiencing a sharp slowdown as it
rebalances to become a consumption-based economy. In
3Q of 2015, growth slowed to 6.9%, the slowest since the global
financial crisis in 2009. In the aftermath of the crisis, the
government encouraged imprudent projects to maintain
growth, resulting from the overall debt-to-GDP to grow from
160% of GDP in 2007 to more than 240% in 3Q15, according
to calculations by the Economist. It is also worth noting that the
ratio soared by 50% in the last four years alone.
There are concerns regarding the reliability of official data.
For example, according to China’s National Bureau of Statistics,
while growth declined from 10.2% to 6.9% from 1Q2011 to
3Q2015, the unemployment rate fluctuated between 4.1% and
4.0%. As China becomes a more important market for OC, the
reliability of official data will become an issue.
Finally, the recent turmoil in the Chinese equity market is
caused by an immature market combined with an incomplete
understanding of markets by participants and government
regulators. Ineffective measures such as the blanket ban on
short sales and the introduction of circuit breakers contributed
to increase the very volatility they were meant to tame.
US
The US Federal Reserve responded to the 2008 financial crisis
with an unprecedented injection of liquidity, which has
inadvertently caused equity valuations to be inflated in the United States. Shiller’s Cyclically Adjusted PE Ratio currently stands at 23.82x,
well above the mean and median values, which are 16.65x and 16.02x, respectively.
Despite a slowdown in industrial production, there are encouraging signs that the US economy will continue to expand. The strength of the job
market is reassuring. The U3 and U6 unemployment rates have fallen to 5.0% and 9.9% as of December 2015, respectively. In fact, the most
recent U6 figure of 9.9% is the lowest since June 2008.
Consumer sentiment has also improved substantially in the past year. University of Michigan’s Index of Consumer Sentiment stands at
92.4 as at January 1, 2016, compared to 79.6 and 76.5 in January 2014 and January 2013, respectively.
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.5
8.5
9.5
10.5
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Unemployment Rate (%)
GDP Growth (%)
Chinese GDP & Unemployment Rate
Mar 2011 - Sept 2015
Real GDP Growth (% YoY) Unemployment Rate
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
United
States
Canada China Germany France Italy Spain UK
Q/Q Industrial Production
Percent Change vs. Period 1 Year Ago
4Q14 1Q15 2Q15 3Q15
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
United
States
Annualized Quarterly GDP Growth
Seasonally Adjusted
4Q14 1Q15 2Q15 3Q15
5.1%
7.0%
4.1% 4.6%
10.2%
11.7%
21.8%
5.3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
United
States
Unemployment Rate
3Q14 vs 3Q15
3Q14 3Q15

Owens Corning - Final

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