Owens Corning (NYSE:OC) shares are up more than 72.42% this year and recently decreased -1.93% or -$1.72 to settle at $87.18. Beacon Roofing Supply, Inc. (NASDAQ:BECN), on the other hand, is up 35.47% year to date as of 12/05/2017. It currently trades at $62.04 and has returned 1.56% during the past week.
Owens Corning (NYSE:OC) and Beacon Roofing Supply, Inc. (NASDAQ:BECN) are the two most active stocks in the General Building Materials industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect OC to grow earnings at a 12.70% annual rate over the next 5 years. Comparatively, BECN is expected to grow at a 15.00% annual rate. All else equal, BECN’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 7.6% for Beacon Roofing Supply, Inc. (BECN). OC’s ROI is 8.60% while BECN has a ROI of 6.00%. The interpretation is that OC’s business generates a higher return on investment than BECN’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. OC’s free cash flow (“FCF”) per share for the trailing twelve months was +1.78. Comparatively, BECN’s free cash flow per share was +3.77. On a percent-of-sales basis, OC’s free cash flow was 3.49% while BECN converted 5.83% of its revenues into cash flow. This means that, for a given level of sales, BECN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. OC has a current ratio of 1.70 compared to 2.10 for BECN. This means that BECN can more easily cover its most immediate liabilities over the next twelve months. OC’s debt-to-equity ratio is 0.62 versus a D/E of 0.43 for BECN. OC is therefore the more solvent of the two companies, and has lower financial risk.
OC trades at a forward P/E of 17.19, a P/B of 2.42, and a P/S of 1.60, compared to a forward P/E of 16.38, a P/B of 2.13, and a P/S of 0.95 for BECN. OC is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. OC is currently priced at a -0.56% to its one-year price target of 87.67. Comparatively, BECN is -1.85% relative to its price target of 63.21. This suggests that BECN is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for OC and 1.90 for BECN, which implies that analysts are more bullish on the outlook for OC.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. OC has a beta of 1.08 and BECN’s beta is 1.46. OC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. OC has a short ratio of 3.92 compared to a short interest of 3.71 for BECN. This implies that the market is currently less bearish on the outlook for BECN.
Beacon Roofing Supply, Inc. (NASDAQ:BECN) beats Owens Corning (NYSE:OC) on a total of 11 of the 14 factors compared between the two stocks. BECN is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, BECN is the cheaper of the two stocks on an earnings, book value and sales basis, BECN is more undervalued relative to its price target. Finally, BECN has better sentiment signals based on short interest.