USG Corp (and a bit of IR)

Today I spent some time reading over the USG annual report from 2006 and I skimmed the 2007 and 2008 annual reports.


The 2006 annual report is required reading. That report discusses the bankruptcy of USG and what how BRK got involved.


I really should review the 2005 annual report, but time is just that. Just to see what USG was saying before they exited bankruptcy.


From what I did read in the 2006 report, USG was very honest. From the 2006 annual report, they stated that they were open to shareholders in saying that the worst case scenario is that the shareholders loose everything. Of course, I'd like to prove this to myself beyond a USG said this in the 2006 annual report.


Regardless, one thing was clear from the 2006 annual report. They are a very transparent company and they are there to serve the shareholder. It was also apparent that they are also there to serve their customers and their employees. It's not shocking to see BRK involved. Instead of providing detail, I recommend people spend 2 hours with the 2006 annual report.


More on BRK. I think Wikipedia says it better than I can so I'll quote Wikipedia. Yes, this is accurate and in line with what the annual report says.

On February 17, 2006 USG announced a Joint Plan of Reorganization to emerge from bankruptcy. Under the agreement, USG would create a trust to pay asbestos personal injury claims. USG's bank lenders, bondholders and trade suppliers would be paid in full with interest. Stockholders would retain ownership of the company. To pay for the trust USG would use cash it had accumulated during the bankruptcy, new long-term debt, a tax rebate from the federal government, and an innovative rights offering. Existing USG stock owners would be issued rights to buy new USG stock at a set price of $40 per share. These rights could be exercised or sold. The $1.8 billion rights offering would be backstopped by Berkshire Hathaway Inc., meaning Berkshire Hathaway would buy all the new shares not bought. For the service, USG would pay Berkshire Hathaway a $67 million non-refundable fee.

So, BRK got involved at $40/share. Actually a little bit less than that due to the fee BRK charged USG. Right now, BRK owns about 17 million shares which is about 17% of USG stock.


Was Warren wrong? I'd say no. Eventually the economy will turn and housing will start growing again. Remodeling will get back to normal as will housing starts. I'm not expecting exuberance again, but the bad times will find an end. Who knows when. No one knows. But the beginning of hte downturn will have an end because beginnings always have ends.


Valuation. (SEE EDIT #1 BELOW)That is the tricky part. 2006 makes things messy. And to an extent 2005 has issues due to the bankruptcy. Regardless, I decided to ignore 2006 and go for the approximately right calculation. This is a tough valuation but I came up with a value of about $40/share. This takes into account a recovery in housing in about 3 years. A full 50% margin of safety is required due to the difficulty in finding a "good" intrinsic value. That is fine though. Buying under $20 is a good deal. So, the latest closing price of $15.46 is a bargain!


So, should I sell off my IR position and roll it into USG? I am considering doing just that. Without discussing to much, IR is recovering quite nicely. It is now at $31 and I view it as being worth $39/share. I'm not to happy with IR seeing how they grossly overpayed for Trane. Trane financials are still available if you'd like to value Trane. I figure IR overpayed by about 25%. Well, point is that IR is 25% undervalued and USG is probably 50%+ undervalued.


EDIT #1: There is risk of shareholder dilution due to $400,000,000 in convertible note that BRK has. I missed this in my first pass. The notes are convertible at $11.40 per share so there is a risk that there will be 35,000,000 new shares of USG. Because of this, USG is worth just under $30/share in my estimate. Maybe $28 or so.