Why I'm Selling Rockwool
Tom Konrad CFA
Earlier this year, I bought Rockwool International A/S (COP:ROCK-B, OTC:RKWBF) with the intention of holding it for the long term.
I chose Rockwool because it was expanding in the US, provides excellent international diversification, has a strong balance sheet with no net debt, and (not least) is a leader in the greenest part of the construction sector: insulation.
Most other major insulation industry players are divisions of large conglomerates like Berkshire Hathaway (NYSE:BRK-B, BRK-A), and Saint Gobain (Paris:SGO). Berkshire Hathaway owns Johns-Manville while Sain Gobain owns CertainTeed.
US-based Owens Corning (NYSE:OC) is the only pure-play exception, but trades at a premium. With a trailing P/E of almost 50, and a forward P/E of 17, OC is still only slightly above book value because of the slow housing sector. With a debt to equity ratio of 60%, OC has significant although not unmanageable debt, and pays no dividend. At the current $34/share it simply is not very attractive to a value investor.
While Rockwool was no bargain basement stock, it looked relatively attractive compared to Owens Corning this spring when I bought it. But a recent price run-up from DKK450 to DKK620 over the last year has mosty closed the gap. The company expects full year earnings of at least DKK700 million ($5.57/share or a forward P/E of around 19.) The dividend yield is only 1.5% – better than nothing, but not exactly large, and the company trades at 1.6x book value, slightly higher than Owens Corning’s 1.14.
While I continue to value Rockwool for the exposure to building insulation and good international diversification, the 25% price increase since I last added to my position this spring (and consequent higher valuation and lower dividend) has led me to reduce my holdings. It’s also been one of the best performers in my 2012 annual Clean Energy model portfolio, but I’m unlikely to include Rockwool in the portfolio for 2013.
While I think the North American housing market recovery will continue, I currently see much more attractive sector players, such as Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF) and PFB Corporation (TSX:PFB, OTC:PFBOF).
Disclosure: Long RKWBF, WFIFF, PFBOF
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