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
Disclosure: Holding shares in USG