Now Is the Time to Buy These Growth Stocks

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You would struggle to find two more dissimilar companies than Owens Corning (NYSE: OC) and Dana Incorporated (NYSE: DAN), but it's what they have in common that really counts. Both are mid-cap stocks set to grow earnings at a double-digit rate in the next couple of years. Let's take a closer look at these two growth-stock candidates for your portfolio.

Owens Corning: A housing stock on the rise

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Owens Corning has had a strong year, and analysts have raised full-year earnings per share (EPS) estimates after each earnings report. For example, going into the first-quarter earnings report, the analyst consensus was for $3.86, only to be increased to $4.01. Fast-forward to second-quarter earnings, and analysts were suitably impressed to raise the consensus to $4.29 -- it now stands at $4.34. Similarly, the 2018 EPS consensus is now up from $4.33 at the start of the year to $5.19 -- no need to get out the calculator; these figures imply nearly 20% EPS growth in 2017 and 2018.

A breakout of the company's segment earnings is shown below, and the good news is that all three segments have growth potential in the coming years.

The roofing segment's revenue can vary from year to year due to major storms and other weather events, but as you can see below, underlying demand coming from remodeling and new construction continues to improve along with the ongoing recovery in the housing market.

Meanwhile, management sees the market for composites (used in construction, transportation, industrial goods, wind energy, etc.) as growing at 1.6 times global industrial production. With commentators expecting U.S. industrial growth to improve to 2.6% in 2018 from 1.9% in 2017, prospects look good for the segment.

The insulation segment has suffered industry overcapacity since the housing market bust, but there are signs that conditions are turning positive again. For example, insulation EBIT (earnings before interest and tax) margin was 11% in Q3 2017 compared to 8% in the same period last year. Moreover, management estimates in a recent investor presentation that U.S. industry capacity is running at 90% in 2017, while "demand growth has exceeded capacity restarts over the past few years." President of insulation Julian Francis outlined at the recent investor day, "We now see a more constructive pricing environment as capacity tightens."

The stock trades on a forecast 2017 free cash flow yield of 6.5% and still looks like a good value.

Dana Incorporated: An automotive stock moving in the right direction

Dana Incorporated makes axles, engine, driveshaft, and transmission equipment for a wide range of transportation companies. Its leading customers include Ford (light vehicles and power technologies), PACCAR (commercial vehicles), Dong Feng (commercial vehicles), and Deere (off-highway drive and motion), but in reality, Dana sells to a wide range of automotive customers and is largely focused on trucks and SUVs.

At the end of 2016, management outlined some pretty ambitious targets for 2019 -- seen as the culmination of a period of intensive investment in technology and expanding its global presence in markets like China. The targets are outlined below, alongside management's recently updated and improved targets.

Dana Incorporated

2016

Original 2019 Estimate

Updated 2019 Estimate

Sales

$5.8 billion

$6.8 billion

$7.2 billion

Adjusted EBITDA margin

11.3%

12.5%

12.8%

EBITDA

$660 million

$850 million

$922 million

Earnings per share

$1.94

$2.35

$2.60

Operating cash flow

$384 million

$590 million

$620 million

Free cash flow

$62 million

$340 million

$360 million

In the context of the current enterprise value (market cap plus net debt) of $5.8 billion and stock price of $31, the company trades on 2019 multiples of EV/EBITDA of 6.3 times and an EV/free cash flow ratio of 16.1 times. The following charts show how those valuations make the stock a good value on a historical basis.

Moreover, on the third-quarter earnings call, CFO Jonathan Collins declared that good earnings this year "as well as our expectations for the remainder of the year combine with these factors to give us confidence that we're on pace to achieve the long-term financial targets that we provided at our Investor Day nearly a year ago, earlier than we originally expected."

Stocks to buy?

All told, if you are confident on U.S. housing and the automotive market (particularly SUVs and trucks), then Owens Corning and Dana Incorporated provide a compelling value opportunity in a stock market that's starting to look expensive. Both companies have beaten their own expectations in 2017, look set for continued growth, and trade on attractive valuations.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ford and Paccar. The Motley Fool has a disclosure policy.