United States Gypsum (USG)

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USG Corporation (USG), through its subsidiaries, is a manufacturer and distributor of building materials, producing a range of products for use in residential, non-residential, and repair and remodel construction, as well as products used in certain industrial processes. The Company's operations are organized into three operating segments: North American Gypsum, Worldwide Ceilings and Building Products Distribution, the net sales of which accounted for approximately 53%, 11% and 36%, respectively of net sales during the year ended December 31, 2006. The Home Depot, Inc. accounted for approximately 11% of USG's net sales in 2006.

USG is trading for over 100 years. It is a recognized brand name due to its SheetRock plaster board product. The company mines its own gypsum and has ever expanding distributor network (see it's latest acquisition of CALPLY) allowing it to further expand its profit margins. Company stewardship deserves a clear A. It is a low cost producer of goods, a position which I expect it to not only maintain but expand as management takes advantage from the fallout of the asbestos litigation in the manufacturing sector. The resulting increasingly bulging barrier of entry gives the company a nice ever expanding competitive advantage/moat.

The current housing slump offers the opportunity to further expand its distribution network by well timed purchases of suitable companies as well as of its own stock which is trading near or below its intrinsic value --which should create value for its shareholders.

It's current P/E is 7.30 with ROE of a staggering 63% (up from 46% since the last quarter).

Cheap? Definitively!

Hint: try and use your own estimated equity growth rate instead of the analysts and see what you come up with. MOS 92$ and sticker of 184$ It won't grow by that amount this year but it has grown by over 25% over a 10 year period, including a couple of similar housing slumps, and thats what these numbers mean. Still don't believe it's cheap?

My time frame for this holding is 10 years. No arrow trading or other fancy stuff. Let the magic of compounding interest do the work!

PS: my new avatar is a picture of Benjamin Graham (in case you wondered)

[RavenTwo]

I'll agree with you here on USG. I was looking at this last spring when it was in the 80's. And since Buffett was picking up shares of this, there must be some value.


As for your avatar, I was trying to figure out who your last guy was.......I thougt it was you, j/k

Raven

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When Buffet took more positions around the 46$ price level, the price was said to have been at liquidation value. Almost one year on, the business has improved, so it's not hard to deduct that today at 46$ it is well below it's liquidation value, especially if you consider the assets of the new acquisition which are now part of the equation.

I would not be surprised to hear later that Berkshire increased their holdings at that price level (again).

At that price level USG is a loooooooooooooooooong term buy and hold. Don't even think about technical price action gimmicks and whatnot. Make your broker poor! Avoid hyperactivity in your portfolio ;)

[RavenTwo]

Since you live in the UK you're currently getting a true 50% discount with the dollar to pound rate right now, so you should be loading the truck up on this as well as other stocks.

Raven

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Originally Posted by RavenTwo

Since you live in the UK you're currently getting a true 50% discount with the dollar to pound rate right now, so you should be loading the truck up on this as well as other stocks.

Raven

I eat my own cooking. 70% of my capital is in USG.

[longterm]

Question with the numbers. I have not done my homework but will do later on in the evening on USG. At this time I am using Justin excel spreadsheet for MOS price. It is way off from what is see from above ..MOS $92.

[npg]

Read my post carefully.

I used the equity growth rate, not the analysts growth rate as value for projected earnings growth. If you don't compensate for what happened during the asbestos litigation (which is a one time problem that the company is able/has overcome), then you get the real picture about their business potential.

Not that the figures required much compensation. Using the equity growth rate instead of the analysts prediction (for this year) the result is more than satisfactory, even using Phil's method.

I wanted to illustrate that.

How do you think I arrived at a call on AAPL at 45$ last year? Back then, nobody believed me that this was effectively at over 50% discount to its earnings potential.

[longterm]

Gr8 ..thanks

[Nick]

I am in USG too.
Check this report out.
I think that your optimism for long term is right.
The sector is in very bad shape and that's why is going down - no hope for good earnings soon if nothing happens with the houses market.
Let see what is with these rumors of buyout. It looks like they contacted Goldman Sachs for this purpose.

[npg]

Great article about USG and its business. Note that this one was written in 2001 (when the previous house market crash occurred).

The Gypsum King - Forbes.com

So let's value this baby.

To use a growth rate, I am quite happy using equity growth as a yardstick. If you do this calculation like phil suggests, then you end up with the growth rates as follows:

9yr: 30%, 5 yr: 26%, 3yr: 31%, TTM: 608%

obviously, because of some unusual events, the numbers are a bit all over the place. We need to adjust. I don't believe that the company grows at 30% (although it is quite likely, but I prefer a bit less enthusiasm here). The analysts predict 10% only to multiply this later on once housing is in full swing again (10% growth for a company in a receding business is quite something). Historically, I am more inclined to go with 15 - 20% growth.

So, whats this stock going to look like to a city slicker (working hard to earn millions so he can enjoy the resulting heart-disease to the full)?

The most common valuation method en vogue at the street is the discounted cash flow model. I don't particular like it, but understanding it helps you to look at companies with the eyes of the trader we are betting against. Someone kindly posted a link to valuepro.net, so lets use that.

ValuePro

Enter USG and click "Get Baseline Valuation".

See, right now the company is actually overpriced. So why is that? The growth rate is negative. Let's adjust this to 0. Enter 0 and click on "Recalculate". So, at 0 growth the value would be anywhere near 40$. But USG has a business that is ever expanding. It is nowhere near negative growth. Type in a pessimisic growth value of 5% and see the value go to 67$. Go with the analysts growth rate and see the value jump to 108.83.

Now, provided that net asset growth is a good indicator of intrinsic value growth, using 15% as growth factor, the value now jumps to 169$!!! And if the company really can provide 20% growth, then the value jumps to an incredible 256$.

And that gentlemen, is about all I needed to know as far as the numbers are concerned. I know I buy into a business with a HUGE margin of safety. The discount is massive.

What I don't know is when the value of a share is going to snap back to it's intrinsic value levels. What I know for certain is that it always does snap back to the correct level eventually. I leave the timing of the market to others. At this price level, I truly would not be bothered if the market closes for 5 years indeed.

The only thing I cannot tell is WHEN the price appreciation is going to happen. However, I do know that it WILL occur. Rather be approximately right than precisely wrong, eh?

For those amongst you who think they can handle a severe burst of greed, punch in a growth value of 30% and see what comes out :P