Following the magic formula in “The Little Book that Beats the Market”, Whitney Tilson and Glenn Tougue of T2 Partners, LLC bought into what they call “the little stock that beats the market”: USG Corp (USG).
At the 2 nd New York Value Investing Congress earlier this month, Tilson and Tougue company made an impressive yet under-celebrated presentation on USG. They stressed that USG currently sports a very high return on tangible capital (>40%), a very high earnings yield (EBIT/EV=19%), and you have Warren Buffett as the largest shareholder with nearly 20% ownership adding to his stake as recently as a month ago at current prices.
As the world's number one producer of gypsum wallboard, joint compound and a vast array of related products for the construction and remodeling industries a 30% market share, USG Corp has been working to widen their “moats” by fortifying the industry’s entry barriers.
Incorporated in 1901 as the United States Gypsum Company, USG, the inventor of wallboard and ceiling tile, the grand daddy of North America's building materials industry, remains the dominant industry force. USG owns powerful brands like SHEETROCK gypsum panels and DUROCK cement board. They manufacture and market interior systems products, including ceiling grid and acoustical ceiling tiles. To reduce their future capital expenditure costs, they dumped a lot of capital expenditures into the 5 years they spent under bankruptcy and used their big profits to build state-of-the-art manufacturing facilities. To further lower their cost, they took a page from Coca-cola and charged into the business field of distributing construction materials and vertically integrating their business. With time- and battle-tested management team and the control of a powerful distribution network, they forced out about 10 competitors since 1995.
Is USG a real bargain? If so, why is it cheap? “Don’t we know the housing bubble is bursting? Indeed we do, but USG is a more stable, high-growth, flexible business than one might think,” explained Glenn Tougue.
Most investors believe that USG is a cyclical stock, Whitney Tilson believes that the cyclicality of U.S. wallboard sales is exaggerated and there are hidden growth opportunities in complementary products like performance finishes, substrates, paints and tools.
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