USG Corp. - The Stock Appreciates and the Margin of Safety Erodes
Looking to the past, USG logged its highest earnings in 1999 when it reported $421 million in profits. Housing starts for that year were 1.6 million or more than double what they are today. The company would probably have logged a much larger profit in 2005 and 2006 had its financials not been skewed by one-time bankruptcy expenses related to asbestos claims. Some 1.9 million houses were built in each of those years. If their earnings were to be normalized as continuing operations (net of bankruptcy expenses), net earnings would be closer to $500 million $600 million for each of 2005 and 2006.
Surely it will be many years before 1.9 million homes are built again, but the likelihood that USG will experience litigation related to some new toxic material in its sheetrock is highly unlikely and so it’s a fair maneuver to strike these figures from those years. When the company does start making money in the future, profits will be muted by higher interest expenses as it took on more debt in 2009. But the company will also not be paying much, if any, in federal taxes as it holds some $1.5 billion in net operating loss tax carryforwards to wash away future pre-tax income.
The stock has risen well over 100% from its nadir in October of last year. Still for those willing to hold for many years it could return much more than that in years to come. The company has a solid moat around its business in the form of its many plants and its favorable cost position against foreign competitors (the heaviness of sheetrock makes it uneconomical to ship it long distances). The company has in excess of $700 million in cash and credit lines to plug its deficits. It also counts the support of Warren Buffett and Prem Watsa who each lent the company cash in return for convertible bonds in 2009.
The company will certainly be making several hundred million dollars in profits in the future. It won’t be next year, or the year after and probably not in 2014 either. But when that time comes the $1.4 billion market value given to it today will be but a fraction of the company’s worth.
For those interested, I've written extensively on USG. Search 'usg' on this link