TRG | The Bottom Line – 10/27

As Q3’23 earnings season ramps up and against the backdrop of a lousy market, TRG noted this week the power of sentiment on relative stock performance. Commercial-construction and RMI-focused Armstrong World (AWI) reported an earnings beat this week, and the stock traded up ~10% intra-day vs. the S&P 500 up ~1% on a “less bad” market outlook. The headlines for commercial remain grim with stats such as the Architectural Billings Index (ABI) dipping below 50 eight out of the last twelve months and with September’s reading of 44.8 the lowest since Q4’21. Note that a “less bad” theme also sent resi end-market focused stocks upwards earlier in 2023. By contrast, Owens Corning (OC) stock traded off 9-10% intra-day vs. the S&P 500 down ~1% the day of earnings this week. While the stock earlier this year traded up on “less bad” residential end market news, OC stock this week was hit by a slightly lower Q4 Street expectation, even in the face of a Q3 earnings beat and overall solid financial metrics. Putting this into perspective, OC YTD generated $631MM in FCF (78% FCF conversion), maintains liquidity of $2.4B, and returned $187MM to shareholders through dividends and repurchases. OC’s return on capital for the TTM is 20%, an impressive level given the fluctuations across the business. It goes to show that even with parallel earnings beats and solid financial beats, it’s all about relative perspective.