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The Stocks Of Warren Buffett - U.S. Gypsum

October 01, 2010 | About:
Josh Zachariah

Josh Zachariah

36 followers
U.S. Gypsum, like many of Warren Buffett’s holdings, has been around through many recessions. Coke, Wells Fargo, Johnson and Johnson and Kraft are some of his other major holdings and (except for Kraft founded in 1903) all precede the 20th century. U.S. Gypsum had a continuous streak of profitable years from 1901 up until the late 80’s when the company was loaded with debt during the leveraged debt bonanza of the 80’s. Even through the great depression the company managed to log a profit as it held little to no debt.

Background Of The Company

In Money of the Mind James Grant profiles U.S. Gypsum in his opening chapter. He remarked that it was a consortium founded in 1901 of 35 smaller gypsum companies managed by an elite group of seasoned businessmen. Gypsum is a material used in wall board which has the important property of being fire-resistant. Grant wrote that lime wall plaster held the lion’s share of the market, but makers of gypsum and alabaster based wallboard sought to uproot that market. Gypsum would later become the standard and U.S. Gypsum would take the lead after a series of price wars with its main competitor.

The company was led by an ultra-conservative businessman in Avery Sewell. Despite the pompous atmosphere of the 1920’s, Sewell remained exceptionally cautious. Grant noted that he warned of an imminent financial collapse in 1928 and even pared back 2,000 employees in 1929 at the onset of the Great Depression. At the time the company remained a cost conscious firm just as it is today regarded as a cost leader in the industry. Plants were located near water in order to use the low cost transport of ships. Sewell would later become president of Montgomery Ward and turned that company into a viable competitor to Sears.

The last 20 years has arguably been U.S. Gypsum’s toughest. It went through two bankruptcies in 1993 and 2001. The first related to the bloated balance sheet it suffered as a result of the buildup of debt in the 1980’s and the latter was a consequence of asbestos related claims. The company has since beefed up its balance sheet and has avoided bankruptcy despite facing one of the worst collapses in housing construction.

Warren Buffett Enters

In 2006 U.S. Gypsum emerged from bankruptcy with Berkshire Hathaway at its side. The company would create a trust for asbestos-related claims and additionally issue $1.8 billion in new shares. Berkshire Hathaway would guarantee the offering by buying any unsold shares. The timing was not the greatest for Buffett. Much of the stock had been purchased at price above $40 (it currently wavers around $12). Buffett did make a small sum at the expense of short sellers. At around the time of the bankruptcy he had leant shares to short sellers whom were naturally betting the stock would fall. Instead the stock steadily rose and he would then collect interest for his lending of the shares.

However, Buffett’s total investment remains at a paltry $200 million. Buffett had also held convertible bonds which he would later exercise in 2009. After exercising the bonds his holding of the firm grew to 20%. Below is a chart of Buffett’s purchases/woes with the company:



U.S. Gypsum Today

The company operates in a highly competitive industry with numerous competitors. However, it does claim to be a low cost producer of gypsum. The company holds the patent to the name Sheetrock in addition to being the inventor of the product. It has recently rolled out a new type of sheetrock that is 30% lighter than current models, but pound for pound more durable. The company claims heavy sheetrock is the single biggest concern for contractors hence its investment in lighter models.

Housing construction has always been a highly cyclical business. The founding president of U.S. Gypsum knew this and current management is conscious of it. A particular feature Buffett looks for in a company is predictable earnings. Most companies in his portfolio of stocks seem to exhibit this yet U.S. Gypsum is certainly of a different breed. At the same time the cyclicality of the company is widely known. Perhaps Buffett is just extending his horizon. Just as it is known See’s Candies (a Berkshire Hathaway company) is going to make marked swings in earnings January to December, U.S. Gypsum is going to make swings in earnings over a much longer construction cycle. This is my own hypothesis, I would be interested in any other opinions for why Buffett would buy the company.

Whether or not that is the case, the company has survived a lot. Housing will rebound sooner or later. The economics of the company are still favorable. Threats to the gypsum model for wallboard have yet to materialize. A brief foray by Chinese producers into the market ended disastrously as Chinese sheetrock was found to cause respiratory problems. Uncertainty will remain about the future of the U.S. economy. One thing will be more certain and that is housing and construction will remain cyclical in nature and will see its day again.

My other pieces on stocks held by Warren Buffet:

Johnson and Johnson

Wells Fargo

Disclosure: Holding shares in USG

Josh Zachariah

About the author:

Josh Zachariah
I credit my father and Warren Buffett for molding me into the investor I am today.

Rating: 4.3/5 (7 votes)

Comments

guru93
Guru93 - 3 years ago
Isn't the key to owning a cyclical, commodity business that they need to be the low-cost producer?

Hence, why XOM is best long-term in oil/gas, right?

Maybe USG truly has that advantage.

Josh Zachariah
Josh Zachariah - 3 years ago
That is certainly what you look for in any company, I recall Monhish Pabrai saying so in a lecture. But Exxon is particularly known for its R&D in upstream operations, which are more profitable than the refining business. I'm not aware of Exxon being a low cost producer, but if it is that would be good to know.

Josh Zachariah
paulwitt
Paulwitt - 3 years ago
Would it be possible he bought it as a strategic asset? For example I understand USG has a distribution network he might like. Also, I understand USG has a billion dollar asbestos trust fund that

may tie in somehow........ just thinking out loud.......

*I noticed Prem Watsa also has a position in the company

* Has anyone looked at Owens Corning (OC) for value?

guru93
Guru93 - 3 years ago
Prem Watsa does have a decent position in the company as well as a German (I think) wallboard company. They own almost as much as Buffett. So, there's something to this one...

Sivaram
Sivaram - 3 years ago
I'm pretty sure ExxonMobil is not the low cost producer, unless you are limiting it to a specific type of upstream operation or a particular region. I believe the Middle Eastern producers, such as Saudi Aramco, may be the lowest cost producers. I remember reading a few years ago that Saudi Aramco may have a marginal cost of production of around $8/bbl while Western supermajors were around $20/bbl. This was a while ago and the costs will be higher but I think ExxonMobil is still not the lowest. Even the Russian producers may have lower costs but I'm not sure.

As for Owens Corning, I was following it a few years ago, when it came out of bankruptcy. I think it is a better company than USG (mostly because USG's financial position is weak) but USG may have a bigger moat (but USG can go bankrupt more easily). If housing doesn't recover, both of these will have difficulties (but do note that some investors like John Paulson are superbullish on housing).
Josh Zachariah
Josh Zachariah - 3 years ago
USG did have a decent balance sheet going into the crisis. Their debt to equity was about par, but naturally the housing collapse wreaked havoc on their balance sheet. For any construction company to survive the crisis should be a good indicator of their strength. Owens does look to be in better shape at the moment, but their debt to equity ratios don't look a whole lot different than USG's, maybe I'm missing something.

Is Owens a low-cost producer in insulation? I didn't realize they held the trademark to the PINK insulation. Another advantage USG and other domestic sheetrock producers have over foreign ones is that it is a low value, heavy good which makes it uneconomical to ship long distances ie China. Even if the Chinese companies can manage to fix the problems in their drywall, the U.S. companies have that proximity advantage in being domestically located.

Josh Zachariah
paulwitt
Paulwitt - 3 years ago
A couple of points:

1) Agree about location becoming a competitive advantage

2) It was interesting that chinese wallboard needed to be imported during the boom. I'm assuming the U.S supply was constricted.

3) With the deep pockets of Mr.Buffett and Mr.Watsa USG should have good financial backing.

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