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USG Corp (and a bit of IR)
Posted by: kfh227 (IP Logged)
Date: August 30, 2009 10:21PM

Today I spent some time reading over the USG annual report from 2006 and I skimmed the 2007 and 2008 annual reports.

The 2006 annual report is required reading. That report discusses the bankruptcy of USG and what how BRK got involved.

I really should review the 2005 annual report, but time is just that. Just to see what USG was saying before they exited bankruptcy.

From what I did read in the 2006 report, USG was very honest. From the 2006 annual report, they stated that they were open to shareholders in saying that the worst case scenario is that the shareholders loose everything. Of course, I'd like to prove this to myself beyond a USG said this in the 2006 annual report.

Regardless, one thing was clear from the 2006 annual report. They are a very transparent company and they are there to serve the shareholder. It was also apparent that they are also there to serve their customers and their employees. It's not shocking to see BRK involved. Instead of providing detail, I recommend people spend 2 hours with the 2006 annual report.

More on BRK. I think Wikipedia says it better than I can so I'll quote Wikipedia. Yes, this is accurate and in line with what the annual report says.
Quote:
On February 17, 2006 USG announced a Joint Plan of Reorganization to emerge from bankruptcy. Under the agreement, USG would create a trust to pay asbestos personal injury claims. USG's bank lenders, bondholders and trade suppliers would be paid in full with interest. Stockholders would retain ownership of the company. To pay for the trust USG would use cash it had accumulated during the bankruptcy, new long-term debt, a tax rebate from the federal government, and an innovative rights offering. Existing USG stock owners would be issued rights to buy new USG stock at a set price of $40 per share. These rights could be exercised or sold. The $1.8 billion rights offering would be backstopped by Berkshire Hathaway Inc., meaning Berkshire Hathaway would buy all the new shares not bought. For the service, USG would pay Berkshire Hathaway a $67 million non-refundable fee.


So, BRK got involved at $40/share. Actually a little bit less than that due to the fee BRK charged USG. Right now, BRK owns about 17 million shares which is about 17% of USG stock.

Was Warren wrong? I'd say no. Eventually the economy will turn and housing will start growing again. Remodeling will get back to normal as will housing starts. I'm not expecting exuberance again, but the bad times will find an end. Who knows when. No one knows. But the beginning of hte downturn will have an end because beginnings always have ends.

Valuation. (SEE EDIT #1 BELOW)That is the tricky part. 2006 makes things messy. And to an extent 2005 has issues due to the bankruptcy. Regardless, I decided to ignore 2006 and go for the approximately right calculation. This is a tough valuation but I came up with a value of about $40/share. This takes into account a recovery in housing in about 3 years. A full 50% margin of safety is required due to the difficulty in finding a "good" intrinsic value. That is fine though. Buying under $20 is a good deal. So, the latest closing price of $15.46 is a bargain!

So, should I sell off my IR position and roll it into USG? I am considering doing just that. Without discussing to much, IR is recovering quite nicely. It is now at $31 and I view it as being worth $39/share. I'm not to happy with IR seeing how they grossly overpayed for Trane. Trane financials are still available if you'd like to value Trane. I figure IR overpayed by about 25%. Well, point is that IR is 25% undervalued and USG is probably 50%+ undervalued.

EDIT #1: There is risk of shareholder dilution due to $400,000,000 in convertible note that BRK has. I missed this in my first pass. The notes are convertible at $11.40 per share so there is a risk that there will be 35,000,000 new shares of USG. Because of this, USG is worth just under $30/share in my estimate. Maybe $28 or so.


Stocks Discussed: USG, IR,
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Rating: 2.8/5 (9 votes)



Re: USG Corp (and a bit of IR)
Posted by: Dr. Paul Price (IP Logged)
Date: August 30, 2009 10:46PM

USG is losing a huge amount of money. They lost in 2008. They're expected to lose $1.59 - $1.66/sh. this year and more losses of $1.17 - $1.66/sh. are expected for 2010.

If BRK had not loaned them $400 million they'd have been bankrupt again already. Thye're paying 10% plus conversion at a relatively low price which will seriously dilute earnings if they ever come back.

USG is a HIGH-RISK speculative stock. While you and Batbeer seem to love this one it is certainly not offering any safety or predictability.

Why in the world would you want this with so many better quality and safer stocks available?


[www.BeatingBuffett.com]


Stocks Discussed: USG, IR,
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Rating: 2.4/5 (10 votes)



Re: USG Corp (and a bit of IR)
Posted by: kfh227 (IP Logged)
Date: August 30, 2009 11:28PM

Yelling doesn't make people think any more of your opinion. If anything, people think less of those that yell. It's like having a 4 year old at a restaurant and yelling SHUT UP at him for talking to loud. The other diners don't think "Wow, what a great dad". They think "Wow, what a jerk".

If one looks at the free cash flows and what to expect when housing recovers, that $400 million isn't much. In 2007, USG generated $847 million in FCF. The interest isn't really that much. $40 million each year over 10 years time. USG can generate that cash.

Generate that cash?
Next year, USG will probably be near FCF break even. Maybe even FCF positive. AS I already stated, all that USG needs is for the housing market to start to recover and for remodeling to resume. Not at idiotic rates like several years ago but back to within historical normals.

As for those generally accepted accounting figures, I don't really care about them. A dart board is just as accurate of a tool. I'm more interested in seeing whether or not USG generates cash.

OK, high risk and speculative. What aspects of your research has led you to this conclusion?

Why would I want this? Like I said in my original post, IR is nearing intrinsic value (my calculation of it) and if it is reached, I need to have some ideas ready. And USG is on the list of ideas. The reason I like USG so much is that it has enough cash to survive a multi year slow down in housing. Housing will eventually recover. It always does. The thing is, you can't wait for the recovery to invest. By then it is already to late.

For what it is worth, I used $0 FCF for year one in my DCF calculation. I then used $180 Million the following year and had that grow at 10% annually for several years and terminated at 4% growth.

The bottom line is that there is a HUGE margin of safety here and a quality business.


As an aside, Prem Watsu owns 7% of USG. So he and WEB own 24% of USG!


Stocks Discussed: USG, IR,
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Rating: 2.2/5 (9 votes)



Re: USG Corp (and a bit of IR)
Posted by: softdude2000 (IP Logged)
Date: August 30, 2009 11:29PM

I too like USG. I bought from $36 to $6, all the way. After housing problems started, I was looking at opportunities in this sector with a long term view. With little knowledge I have, I "imagined" some similarities with KO. I felt like USG was best because of duopoly they enjoy in the business (like KO with pepsi). Strong brand. Like coke, I thought people wont plan on replacing that with something else because compared to other costs this is less significant cost. I mean dry wall is cheaper material in the house compared to flooring or wood or iron or concrete. House designs substitute solid wood with other kinds of wood-like but makes no sense to plan on replacing USG brand. I think of china test always - can a chinese company compete and win over? I dont think so because both gypsum and natural gas are abundant in US compared to anywhere else in the world and because a ton of gypsum cost only $16 (or something like that) transportation costly will prohibit chinese competition. I felt this is even inflation play.


Stocks Discussed: USG, IR,
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Rating: 2.7/5 (9 votes)



Re: USG Corp (and a bit of IR)
Posted by: softdude2000 (IP Logged)
Date: August 30, 2009 11:30PM

Comparing USG with KO is premature considering excellent financial strength and worldwide market of KO. It was just an initial idea.


Stocks Discussed: USG, IR,
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Rating: 3.1/5 (7 votes)



Re: USG Corp (and a bit of IR)
Posted by: kfh227 (IP Logged)
Date: August 30, 2009 11:36PM

softdude2000,

USG gives a multitude of competitors in their reports.

USG is funny though. They mine their own gypsum and produce their own paper. They cut out the middle man big time. And their recently built drywall factory (2006 finish date I think) is extremely efficient in terms of energy use. They also hedge natural gas so spikes in energy prices will have less impact.

I think the interesting thing about USG though is their retail outlets:
[www.lwsupply.com]

This could be the next Lowes or Home Depot, except for contractors. A low cost provider for certain building materials.


Stocks Discussed: USG, IR,
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Rating: 2.2/5 (6 votes)



Re: USG Corp (and a bit of IR)
Posted by: softdude2000 (IP Logged)
Date: August 30, 2009 11:43PM

There are other competitors but only two big players - one is USG. USG claims low cost production but I havenot seen any numbers on that. They say it in annual reports and even in quaterly meetings but they stay away from being specific. I would not have invested in USG if not for WEB because they went through many special events like asbestors, lot of debt, big profits in bull market and difficult to see any stable normal years. As I read and thought through, I got more confidence.


Stocks Discussed: USG, IR,
Rate this post:

Rating: 2.1/5 (8 votes)



Re: USG Corp (and a bit of IR)
Posted by: kfh227 (IP Logged)
Date: August 30, 2009 11:54PM

The asbestos thing looks to be behind USG.

I think the newest plant is either 40% or 100% more efficient than the oldest drywall plants were. I forget the figure. One of the annual reports(2006 I think) mentions this. I'll try and look this up tomorrow.

Bottom line though is that FCF is what one must look at and when one does this, a compelling opportunity is in our faces.

As for WEB being a factor, sure he is. USG was brought to my attention because of him. I did my own work though. And it's easy to see why USG has competitive advantages if you read the annual reports.


Stocks Discussed: USG, IR,
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Rating: 2.0/5 (7 votes)



Re: USG Corp (and a bit of IR)
Posted by: DaveinHackensack (IP Logged)
Date: August 31, 2009 12:42AM

"IR is nearing intrinsic value (my calculation of it) and if it is reached, I need to have some ideas ready."

Why, what's your rush? You can't let the money sit in cash for a few weeks or months while you wait for a compelling opportunity?

"Playing with the font was done to illustrate a point."

What point? That you can act like a four year old too?





My signature: I blog at [steamcatapult.com]


Stocks Discussed: USG, IR,
Rate this post:

Rating: 2.1/5 (10 votes)



Re: USG Corp (and a bit of IR)
Posted by: kfh227 (IP Logged)
Date: August 31, 2009 05:42AM

Quote:
"IR is nearing intrinsic value (my calculation of it) and if it is reached, I need to have some ideas ready."

Why, what's your rush? You can't let the money sit in cash for a few weeks or months while you wait for a compelling opportunity?


If there is nothing to buy, I will wait. If a good company is undervalued, though,why wait? USG is at a much lower price than what WEB paid for it initially. I might as well look into USG and determine what I an about it. The whole point of investing is to always be reading annual reports and researching stock. That way when an opportunity appears, you know what to do already and you don't need to spend time figuring things out.

Quote:

"Playing with the font was done to illustrate a point."

What point? That you can act like a four year old too?


I knew I shouldn't have done the font thing. But it was needed. If it plants a seed so be it. If not, oh well.


Stocks Discussed: USG, IR,
Rate this post:

Rating: 2.9/5 (8 votes)



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