billytickets

[karin schoenherr]

Like i stated a few times, USG is one of my favorites with these prices. I think the risk-reward-relationship is extremely good.


To the history of USG: (most direct from Wikipedia because my English is suspect at best)


USG was founded in 1901 and is the largest manufacturer and distributor of wallboard (sheetrock as trademark, in Europe it is called Rigipsplatten where Gebrueder Knauf Company is the leading company) in the US and the largest manufacturer/distributor of gypsum products in North America.

USG operates 21 wallboard plants in the US and 14 gypsum mines in North America.

USG operates on aggregate the newest plants and mines and is (on aggregate) the low-cost-company in the business.


Chapter 11

In 1993 they went into bankruptcy because of overleveraging in an attempt to prevent an hostile takeover. With the next down cycle they had not the earning power to pay the interests on the debt.

In 2001 they filed for Chapter 11 again because of asbestos.
In 2006 they emerged from Chapter 11 with no future obligations.

Warren Buffett said that the management of the Chapter 11 case was one of the best management performances he has seen (I think that means that the management is not bad....)


Little business overview

USG operates 3 business units:

1. Gypsum (wallboard and mining..)
2. Ceilings
3. Distribution (L&W Supply)

Over 50% of the revenues were generated from the extremely cyclical Gypsum business.

What is interesting:
In the downturn of the 90s the number of competitors in the wallboard business consolidated from 18 to 8.
What could be a better time for USG as a market downturn??


To the stockholders:
(See the stevenwalthall articles to USG)

No stockholder has the right to buy more than 15% of the shares without the thread of a poison pill (with the exemption of WEB).

Until 2013 WEB has "only" the right to buy 40% of the company(see latest annual report).

"Strong hands stockholder positions"

1. Berkshire 17,2%
2. Knauf 12,6% (this position is rising)
3. Bruce Berkovitz 5,5%
4. Brian Rogers 2,5%
5. Martin Whitman/Third Avenue: 7,4%
6. John Rogers 6,7%
7. Wallace Weitz 3,0%

These value oriented investors (yes, Knauf is a company in this business but they are respected for their financial positions too) own roundabout 55% of the company with many others value guys too (Whitney Tilson wrote an analyses with the title: The little stock that beats the market.....)

55%? To this number i will come later!

"Trembling hand positions"

With trembling hand positions i mean the Mr.Markets fraction. One can not say which investor is shivering on bad news, but one thing i can say:

The short sellers are shivering on good news. This could lead to interesting implications.

Short sellers position: Roundabout 21% of the shares are sold short (see shortsquezze.com

55%+21%= 76% => hmhm (Later!!)


Little analyses(a few will know this analyses from another forum)

The near-future-earnings and cashflows of USG are definetely not predictable because of the extremely cyclical Gypsum Business (that means not that the other units are not cyclical!).

Because of the market downturn the future looks lousy at best.

But to the facts:

1. Big entrance hurdles in the business (it makes no oeconomic sense to transport gypsum from China to the US because of price differences)
2. USG is the low cost provider
3. The revenue rose 8% per annum over the last 18 years
4. Pessimistic forecasts expect 3-4% revenue growth in the gypsum business
5. The EBIT-revenue-ratio was in the range of 4,1%(crisis) to 22,8%(boom) over the last 18 years. The average is 12%.
6. Like WEB said: The management looks not bad.

The equity ratio is 45%. The debt is relatively low, the interests payments are roundabout 100 million$ (conservative assumption). Revenue in 2006 was 5.8 billion (this year will be lower, says my crystalball )

Little math:

In the last 18 years were 3 down periods, so you can count that the data of the last 18 years are a valid estimate of the future.

=> I assume that the EBIT-ratio will stay at 12% on aggregate (I hope the market downturn will be extreme so a few competitors have to leave the playing field)
=> I assume that the revenue stays at 5.8 billion for the future (unrealistic because of the growth of the business. You can bet that i think that USG will get a meaningful part of the business growth).

Then: EBIT= 5.8 billion*12%= 700 million$
=> EBT= 700-100 (interests payments)= 600 millions$
=> Net earnings= 390 million $ (assumption: tax rate of 35%)

=> NORMALIZED earnings of 4$/share.

With a price of 36$ this means: PE=9 or earnings returns of 11,1%!!
(assumption: no growth, no growing EBIT-ratio).
This means a 4-bagger in roundabout 13 years with a conservative (in my view) assumption.

With a shareholder equity of roundabout 22$ the normalized equity return is 20% with a PB-ratio of 1,6!

Price-revenue-ratio now (not normalized!!) roundabout 0,6. (Every company with a good long term predictability and meaningful ratios a PR-ratio under 1 is a good screening point to start with)

Summary

In my view USG is extremely undervalued. In the short term it could be that the price drops even further (when Knauf can not buy even more) when the trembling hands and Mr.Market leave to the exit-door.

In the long term it looks like a steal in heaven.

Happy investing!!

P.S.1: USG is now my secondbiggest part of my portfolio. With every testing of the 34$ I will buy like a wild bee. If- but this will be a big if- we see 32$ I will be very ecstatic

P.S.2: I think that i am very value orientated, and short term plays are not in my interest. But one question:

What do you think will happen when 55% (still rising part of strong hands) and 21% (short sellers) and a not improble shock (like news that WEB buys) occurs?
Thats only a short term speculation that i am not interested in. But it would be funny to watch.

P.S.3: Am I shivering because of a recession. No! I hope the gypsum business will get a very hard knock because i know that the low cost provider will stay in the market if the management will not get mad. I am very confident that the management is good. Why? Because WEB "told me"

P.S.4: Have I seen that the annual reports are that good? Hell no. The annual reports of USG were to heavy for my "limited accounting skills". But I am not worried because the best accountants of the world (WEB, Weitz and Whitmann) checked the reports for me

[stevenwalthall]

Hello Karin,

I was wondering when and if you were going to chime in .

I think your out look and time spent with this post is very valuable to those who will read , listen and learn. I agree with you as indicated in my posts on this forum................In short sleep well owning this stock. I was wondering if you could shine some light on Knauf..Do you know anything about the operation?

I allways wonder why a German company would be buying here. only to spec. that there is a takeover, merger in the wind.

Steve W.

[karin schoenherr]

Hi steven,

like i said my english is suspect at best.
What is the meaning of "to chime in"?

To your question belonging to Gebrueder Knauf:

Knauf is in the same business. In Europe and especially in Germany they have a very good position in making and distributing wallboards(Rigipsplatten).

I never watched the company (because they are not listed) until the buying spree in USG. Since then i am aware when a Knauf-bus is on the road.

A German financial paper (called Handelsblatt) did a story a few week ago about the managers of Knauf.
Summary: Laid-back managers with a look on the longterm growth of the business.

I- maybe i am wrong- do not think that Knauf seeks a merger. But if I would be wrong, i definetely would not cry .
Like I said, I think that USG is a pure value play. So I only look at the longterm here, and I am pretty confident that i will get a not-bad-return on my money. (speculation on merger is only noise. But it would be a good noise)

Happy investing!

[stevenwalthall]

[brianltd]

Hey Karin, I enjoy your posts, you seem very knowledgeable on analysing companies, good insight on USG, I also own it in my portfolio. I bought at 38$. I hope to add if it hits 34$ ish also. You say this is your second biggest stock in your portfolio, what is your first, if you don't mind me asking. Mine happens to be brk-b(WEB), mainly because I bought it awhile ago (3 years). My main other holdings are (jnj,wmt,bud,unh) and some canadian banks, because I'm from canada. Do you have a designation in accounting, because you seem quite well read. Enjoy your thoughts.

Happy holidays

Brian

[karin schoenherr]

Hi Brian,

my biggest holding until now is JNJ. They were extremely undervalued some 6 months ago. Now they are "only" awfully undervalued.

Happy investing!

[Winglessangel]

This is really good stuff on USG . Does anyone have a 3 -5 year price range on this stock

[value sniper]

wing- I dont have a price range and have held this stock for some time getting in at 12 change and 6 and change. As I stated in another post I did not sell when at 100. This stock does have tremendous value and even with the housing dilemmas ( good for industry compression) this company will flourish once again. When? I dont know. The floor on this stock is solid with the heavy hitters on board as karin and steve have pointed out along with their other valuable insight. Not only is this stock a great value, but its a great stock to hold in a non retirement account as it pays no div and you pay no tax consequenses while it compounds.