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Investing.com -- Fitch Ratings has upgraded the ratings of Owens Corning (NYSE:OC), a leading player in the building and construction materials industry. The company’s Long-Term Issuer Default Rating (IDR), senior unsecured notes, and revolving credit facility ratings have been raised to ’BBB+’ from ’BBB’, indicating a stable outlook.
This upgrade is a reflection of the improved business profile and deleveraging of Owens Corning, following its $3.9 billion acquisition of Masonite International (NYSE:DOOR) Corporation in May 2024. The company’s ratings are a testament to its dominant market position across all major businesses, strong brand recognition, balanced product, market and geographic diversification, and robust profitability and free cash flow (FCF) generation.
However, the company faces risks associated with market cyclicality and fluctuating raw material costs. While Owens Corning follows a disciplined capital allocation policy, it may temporarily operate at the upper end of its leverage target for potential acquisitions.
Fitch acknowledges Owens Corning’s strong credit metrics, including a pro forma EBITDA leverage of about 2x for the last twelve months ended Sept. 30, 2024. The agency expects the EBITDA leverage to hover between 1.7x and 2.0x in the coming years. No significant debt reduction is anticipated in the near future as the leverage is forecasted to settle below management’s target of 2.0x-3.0x.
The acquisition of Masonite has added strategic value by expanding Owens Corning’s overall footprint and enhancing its position in the building products sector. The company is also considering strategic alternatives for its global glass reinforcements business, which generates about $1.3 billion of annual revenues.
Owens Corning’s EBITDA and FCF margins are strong compared to its investment-grade building products peers. The company’s EBITDA margin is expected to be around 23.5%-24.5% in 2024, and 21.5%-22.5% in 2025 and 2026, which is above the high-teen EBITDA margin percentages reported between 2017 and 2020.
FCF margins are forecasted to settle between 5.5% and 6.5% in 2024-2026, lower than the low-double digits reported between 2020 and 2023. The decrease in FCF is due to increased capital expenditures and higher dividends. The company has recently increased its quarterly dividend by 15%.
Owens Corning has a well-balanced geographic and end-market diversity, with about 70% of revenues coming from the residential construction market. The company also has strong leadership positions in all of its core product offerings within its roofing, insulation, door, and composites segments.
The company’s credit metrics are in line with investment-grade peers, including PPG (WA:IBSP) Industries (NYSE:PPG), Inc. (BBB+/Stable) and The Sherwin-Williams Company (NYSE:SHW) (BBB+/Stable) and Masco Corporation (NYSE:MAS) (BBB/Stable), but stronger than Fortune Brands (NYSE:FBIN) Innovations, Inc. (BBB/Stable).
As of Sept. 30, 2024, Owens Corning had robust liquidity, with $499 million of cash and $996 million of borrowing availability under its $1 billion revolving credit facility that matures in March 2029. The company also has $299 million of borrowing availability under its $300 million accounts receivable securitization facility that matures in February 2025.
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