At Saint-Gobain, the Glass is Half-Full

As with building a skyscraper, the results won't be evident immediately. Saint-Gobain is working its way through a difficult second half of the year, as it did in 2011, and earnings first could drop by double digits. But investors who get in now could reap the rewards as the building blocks for a profitable future are moved into place. The shares, which closed Friday at 27.83 euros, could climb as high as €34 in the next 12 months, some analysts say.

That's a lofty return for a company that has underperformed in 2012 in part due to the belt-tightening prescribed in Europe in response to the euro-zone financial crisis, which reduced demand for construction. Saint-Gobain generates more than half of its annual revenue in Europe. Its shares have dropped 6% in value this year, while the Stoxx Europe 600's construction and materials sector has climbed more than 11%.

Saint-Gobain now trades more than 25% below its 52-week high of €37.62, and for less than 10 times estimated 2013 earnings of €2.83 per share, below both its historical average of about 10.5 times and the sector average of between 12 and 13 times. It stacks up favorably against European rivals like 

Saint-Gobain, which has a market value of more than €14 billion, also offers shareholders a dividend yield of 4.5%. That is likely to fall to about 3.6%, in line with the drop in earnings per share for 2012. However, it still is almost double the yields its rivals offer. The company is expected to report earnings before interest, taxes, depreciation, and amortization of €4.42 billion this year on revenue of €43.1 billion, compared with Ebitda of €4.95 billion on revenue of €42.12 billion in 2011.

Almost half of Saint-Gobain's sales come from distributing building materials. The unit reported a profit margin of just 4.2% in 2011, but that could improve in 2012 as the company has raised prices. It also has seen growth in the U.S., Germany, and Scandinavia in the first nine months. Its construction- products division has healthier margins—9.5% last year—but the slowdown in Western Europe has crimped sales.

Management has been focused on maintaining a high level of free cash flow and a strong balance sheet. It has been scrupulous in controlling costs. Saint-Gobain is trimming expenditures and expects to strip €500 million in costs from the business in 2012, on top of savings of more than twice that amount in recent years. Its financial discipline is due in part to the ownership interest of 

TWO PROFIT WARNINGS THIS YEAR aren't an indication that it is sliding back to its old ways. Rather, they are symptomatic of the problems in some businesses. For instance, the flat-glass sector suffered from overcapacity, but Saint-Gobain and competitors such as 

The packaging business, Verallia, which had a profit margin of 12.3% in 2011, is showing encouraging sales volume. If equity markets continue to recover in 2013, Saint-Gobain could revive plans to sell a portion of the business to the public. An IPO of the world's No. 2 producer of glass containers after 

There's a framework in place at Saint-Gobain to build solid returns. Investors who brush away the dirt surrounding these shares may find a real gem.

THE STOXX EUROPE 600 INDEX closed Friday at 274.85 points, up 1.6% on the week. Shares of