I try to contrast the stock with that likes of Apple. Apple, for one, is a great company. It holds an incredible brand, churns our returns on equity well in excess of 20% with profit margins also in excess of 20% and very little debt to show for. However its success is relatively recent. If you dig bag 5 years you see profit margins of 10%, in 2002 it was 1.1%, their best year in the 90’s was an average 9.8%.
The question for Apple shareholders is will the decades of the 2010’s be more like the 2000’s or 1990’s? It’s very difficult to tell as the technology business is highly competitive and market leaders change with haste. I would gladly accept any of the profitable decades USG has had at today’s stock price. There will be cycles in the housing market and many of the problems in the past such as asbestos and leveraged buyouts are unlikely to be repeated again.
The sheetrock business though less exciting and not endowed with incredibly high margins is hardly one that will see such dramatic changes. USG is the market leader in sheetrock and has been so for many decades. It holds about a 30% market share in sheetrock industry and has not seen marked shifts outside that figure. Firms that retain market share over time convey monopoly power. Intel and Microsoft had once held a firm grip on the hardware and software markets for many years as their large market shares changed very little during their reign (they still have a decent grip at the moment).
By contrast the smart phone market in which Apple competes shows a very competitive market. Nokia, which once reigned over the cellular phone market, has seen its market share drop from 40% to just over 10% in a year’s time. Google has catapulted itself up by leveraging the android operation system across many carriers. These kinds of rapid shifts don’t bode well for the underlying competitors. Research in Motion’s dramatic fall is equally indicative.
I feel much more confident projecting where the sheetrock industry will be in 10 years rather than what kind of technology people will be using. Houses are going to be built with sheetrock and new sheetrock companies are not going to sprout up over night. In fact the market has grown consolidated as it has contracted from 20 to 8 companies over the last 20 years.
The main concern is can USG sustain more bloodletting to its checking accounts and make it out of the housing downturn? The free cash flow loss in 2008 was $403 million, there was a gain of $95 million in 2009 and a loss of $133 million in 2010. These figures are more important to its viability than earnings right now because of the non-cash expense of depreciation that is written off earnings. Depreciation is a real expense, but the company has the liberty of idling old factories and ones that may need investment as it only operating at 50% capacity. Capital expenditures which show up in free cash flow will likely be much higher in future years, but that outlay can be deferred at the moment.
The company has in excess of $700 million in cash and guaranteed credit lines available to it. This would sustain losses like it has for a several years. The company could tap bond markets should it need especially if the Fed is going to follow through with lowering long-term rates. But given further idling of plants and other cost-cutting the company is pushing towards profitability whether or not demand returns.
I’m not expecting a quick buck on this stock, time will be the friend of the USG shareholder, hopefully just not too much of it.
Disclosure: Long USG