Owens Corning (NYSE:OC) shares are up more than 3.86% this year and recently increased 2.13% or $1.99 to settle at $95.49. NCI Building Systems, Inc. (NYSE:NCS), on the other hand, is down -1.04% year to date as of 01/10/2018. It currently trades at $19.10 and has returned -2.05% during the past week.
Owens Corning (NYSE:OC) and NCI Building Systems, Inc. (NYSE:NCS) are the two most active stocks in the General Building Materials industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect OC to grow earnings at a 12.70% annual rate over the next 5 years. Comparatively, NCS is expected to grow at a 19.30% annual rate. All else equal, NCS’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 8.74% for NCI Building Systems, Inc. (NCS). OC’s ROI is 8.60% while NCS has a ROI of 11.70%. The interpretation is that NCS’s business generates a higher return on investment than OC’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, NCS’s free cash flow per share was +0.81. On a percent-of-sales basis, OC’s free cash flow was 3.49% while NCS converted 3.06% of its revenues into cash flow. This means that, for a given level of sales, OC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. OC has a current ratio of 1.70 compared to 1.70 for NCS. This means that OC 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 1.27 for NCS. NCS is therefore the more solvent of the two companies, and has lower financial risk.
OC trades at a forward P/E of 18.05, a P/B of 2.60, and a P/S of 1.71, compared to a forward P/E of 13.99, a P/B of 4.35, and a P/S of 0.72 for NCS. OC is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. OC is currently priced at a 4.17% to its one-year price target of 91.67. Comparatively, NCS is -11.7% relative to its price target of 21.63. This suggests that NCS 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 1.90 for OC and 2.30 for NCS, which implies that analysts are more bullish on the outlook for NCS.
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 1.02 and NCS’s beta is 1.64. OC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. OC has a short ratio of 3.50 compared to a short interest of 1.23 for NCS. This implies that the market is currently less bearish on the outlook for NCS.
Owens Corning (NYSE:OC) beats NCI Building Systems, Inc. (NYSE:NCS) on a total of 8 of the 14 factors compared between the two stocks. OC is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, NEM has better sentiment signals based on short interest.