USG Corp. (NYSE:USG)
USG Corp. invented wallboard and mineral wool ceiling tile and is a leading producer of: gypsum wallboard, joint compound, construction and remodeling industry products, ceiling suspension systems, and others. Their products are integral to the commercial and residential construction industry. They also make acoustical panel and specialty ceiling systems. L&W Supply, a subsidiary, is the nation’s largest drywall and related building products distributor. USG has cornered about 30% of the North American wallboard market, and its distribution business sells about 12% of all wallboard in the U.S.
USG’s stock has had a fraught history over the last decade. Peaking at over $114 in 2006, it now hovers near $8, one dollar higher than its 52-week low of $7.02. In 1999, it fell from over $60 to less than $4 in 2001. That is when Warren Buffett entered. Berkshire Hathaway bought 6.5 million shares, or 15% of the company in November 2001.
Buffett’s interest in the stock came several months after the company filed Chapter 11 bankruptcy in July 2005 due to an onslaught of asbestos litigation. The company had been named in more than 250,000 asbestos-related personal injury claims and paid over $450 million (before insurance) to resolve them through 2001. Costs for 2001 were expected to exceed $275 million.
By February 2006, USG was ready to emerge from bankruptcy and its stock reflected the optimism – it had risen to over $114 per share. It also reported its sixth straight year of revenue growth and free cash flow had also grown from 2001 through 2005. In the third quarter of 2006, Buffett purchased 10,200,992 more shares at an average price of $48.33, and in the fourth quarter, he bought 371,200 more at $41.77 per share, according to an SEC filing. His total stake increased to 17,072,192, or 19% of the company. The stock has slowly declined to its present $8.
However, in 2006 it also repaid its lenders and creditors in full, and set up a $3.95 billion trust for asbestos claimants. It reported a loss that year of over $4 billion. Cash flow in 2007 rebounded robustly to $847 million, but the recovery was just in time for the housing crisis. By 2008 the company’s financial results had declined in almost every category, while long term liabilities and debt mounted to approximately $2.4 billion, and cash increased to $472 million.
Buffett had further dealings with the company in 2008, in an agreement that involved Prem Watsa. USG reported in November 2008 that it would sell a total of $400 million of 10 percent contingent convertible senior notes due 2018 – $300 million to Berkshire Hathaway Inc. and $100 million to Fairfax Financial Holdings Limited. The stocks would become convertible into shares of common stock at a conversion price of $11.40 per share.
"We are gratified by the expression of confidence in USG Corporation by two premier financial institutions," said USG Corporation Chairman and CEO William C. Foote. "We consider these substantial investments by Berkshire Hathaway and Fairfax as validation of our business strategy and the company's long-term prospects. This transaction provides USG with long-term capital that significantly improves our financial flexibility as we manage through the steep recession in our primary markets."
The company planned to use proceeds from the sale for general corporate purposes, including a partial repayment of outstanding amounts under its unsecured credit agreement.
Thus far, Buffett has not sold any of his shares of USG.
Prem Watsa acquired more shares as the price fell. He owned 5,000 shares prior to the third quarter 2007, and bought 4,500 more that quarter at $40.92 per share. He made several other small purchases and as the price declined bought more aggressively. In the fourth quarter of 2008, he bought 7,094,700 shares at $12.48 per share. After several other small purchases, he sold 522,500 in the third quarter of 2010 at $12.7 per share.
In his 2008 shareholder letter, Watsa said:
As shown in the table below, at the end of 2008 we had taken advantage of the major decline in stock prices to purchase additional positions in outstanding companies with excellent long term track records which we contemplate holding for the long term.
USG’s industry faced another challenging year in 2010, the fourth consecutive year of contraction in the U.S. wallboard market. Sales declined from the prior year due to weakened demand in the United States, leading to an operating loss for the year. In response, USG has reduced costs and sought to improve efficiency. On a positive side, by the end of 2010 it had strengthened its capital position to $1 billion in liquidity. U.S. housing starts increased modestly from 2009 to 600,000 units, and the long-term demographic need for new housing in the United States is approximately 1.5 million new units per year, the Harvard Joint Center for Housing Studies reports.
U.S. Bancorp (NYSE:USB)
Minneapolis-based U.S. Bancorp (NYSE: USB), with $321 billion in assets, is the parent company of U.S. Bank National Association, the 5th largest commercial bank in the United States. The company operates 3,086 banking offices, 5,086 ATMs in 25 states, and provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses and institutions. U.S. Bancorp and its employees are dedicated to improving the communities they serve, for which the company earned the 2011 Spirit of America Award, the highest honor bestowed on a company by United Way.
U.S. Bancorp is one of only three bank stocks of Warren Buffett. He owns 3.59% of shares outstanding, and it is 3.4% of his portfolio. He has owned shares since before 2006 and has a total holding of 69,039,426 shares. The bank’s stock price stayed around the $30 range from 2006 all the way to the end of 2008. Around when it fell to under $9 in the first quarter of 2009, Buffett bought 1,488,000 more shares.
The stock price rebounded rather quickly. From its low point in the first quarter to the end of 2009, it increased 174% to $24. Its 52-week high is $22.74 as of Friday.
Prem Watsa bought 8,800 shares of U.S. Bancorp in the third quarter of 2008 at $31.10. He also loaded up on shares when the price plummeted in the first quarter of 2009, buying 15,828,700. In the fourth quarter of 2009 he sold 13,500 shares when the price went up to $23.25, then sold more in the first and third quarters of 2010. His total stake is currently 4,448,310.
According to Bloomberg, after Fairfax’s annual meeting in Toronto in April, Watsa told reporters U.S. Bancorp and Wells Fargo are “two banks that we think are very conservative in their approach to risk. We like banks that are very conservative.”
In its 2010 letter to shareholders, chairman, president and CEO Richard K. Davis affirmed the bank’s risk-aversion, “Although we are defined as a large financial services company, we are still, essentially, an uncomplicated, (even “old-fashioned”) bank. Our lower-risk business model and focus on consumer and commercial banking, credit cards, quality home mortgages and fee businesses differentiate us from institutions whose investment banking, brokerage, insurance and other businesses are more volatile and exposed to economic forces more than U.S. Bancorp.”
From 2009 to 2010, U.S. Bancorp’s revenue increased from $19.5 billion to $20.5 billion and earnings per share increased from $.97 to $1.73. Return on common equity increased from 8.2% to 12.7%, compared to the median ROE of its peers of 5%. It also increased its Tier 1 capital ratio to 10.5% from 9.6%. Loans rose to a record $197 billion, though the industry as a whole is still facing muted loan demand.