New Threads Only:  Add to Google Reader or Homepage
New Threads & Replies:  Add to Google Reader or Homepage
Forums are for serious investors only. GuruFocus Forum Rules.

Forum List » Guru News and Commentaries
Guru News, Stock picks and commentaries
New Topic
Goto Thread: PreviousNext
Goto: Forum ListMessage ListNew TopicLog In
Goto Page:  Previous123456Next
Current Page:2 of 6
Re: Buffett's USG Bet Hits a Wall
Posted by: nmithani (IP Logged)
Date: June 19, 2008 12:42PM

Using a 10 yr DCF model with the following assumptions
discount rate = 10%
growth rate = 8%
I see a value of around $14 - $15. Difficult to make a case for USG being currently undervalued or even fairly valued unless of course sales growth/profit margins dramatically accelerate beyond historical averages.



Guru Discussed: Warren Buffett: Current Portfolio, Stock Picks
Stocks Discussed: USG,
Rate this post:

Rating: 0.0/5 (0 votes)



Re: Buffett's USG Bet Hits a Wall
Posted by: alanb9 (IP Logged)
Date: June 19, 2008 01:56PM

Just for grins and giggles, I plugged USG's numbers (most recent #s used were 2007 year end) into fwallstreet's spreadsheet to arrive at an intrinsic value.

Using a 15% discount rate, using that method gives an intrinsic value of $95.24.

Since there are those here who strongly disagree with his method of adding stockholder's equity back into the valuation, I also did the valuation not adding stockholder's equity and the resulting IV is $72.15.




Guru Discussed: Warren Buffett: Current Portfolio, Stock Picks
Stocks Discussed: USG,
Rate this post:

Rating: 3.0/5 (2 votes)



Re: Buffett's USG Bet Hits a Wall
Posted by: Dr. Paul Price (IP Logged)
Date: June 19, 2008 01:59PM

Using 2007 numbers [when they were still profitable] makes all projections not-meaningful. Even cash-flow for 2008 is almost certain to be negative.

They have big losses now and for the forseeable future.


In the next 12 months the absolute value of this company is going to shrink due to continuing losses. It will be worth less [not worthless] than it is today.

Why buy now?



Guru Discussed: Warren Buffett: Current Portfolio, Stock Picks
Stocks Discussed: USG,
Rate this post:

Rating: 2.0/5 (1 vote)



Re: Buffett's USG Bet Hits a Wall
Posted by: Evan (IP Logged)
Date: June 19, 2008 02:34PM

Dr. Stocks has a point.

If there are losses now and in the near future, then it may be better to wait for the stock to take a meaningful dive before its time to get in.

Dreman recommended buying cyclical stocks bellow book value, and I think thats a good general guide for USG.

Having said this,I don't think the company's value will shrink much with losses [the good doctor may be talking about something different than I am, so correct me if I'm wrong]. The company will still earn what it will earn in the future, despite what happens in the present. All we can do is try to guess what the earnings potential is, and base our value on this figure. Generally taking a ROAA over the past...10 years... is a good guide to predicting current earnings potential in the present, under normal business conditions.



Guru Discussed: Warren Buffett: Current Portfolio, Stock Picks
Stocks Discussed: USG,
Rate this post:

Rating: 0.0/5 (0 votes)



Re: Buffett's USG Bet Hits a Wall
Posted by: alanb9 (IP Logged)
Date: June 19, 2008 02:35PM

Stox,

This is a really interesting point of view for you, because historically on GF, you haven't really cared about macro trends, or at least it doesn't seem to me that you have.

I agree the macro trend is against USG and that the company's shares will almost certainly be selling for less than they are now at some relatively near term time. However, that doesn't mean the long term future value of the company will be significantly less. For someone who does choose the current valuation to buy, they may need some antacid to prevent ulcers in the short term, but long term (3-5 years) this should be a good entry point, as long as the subprime stuff works out and the housing industry recovers some, eventually.

As others have pointed out, this recession in building products will not last forever and the longer it lasts, the fewer competitors USG will probably have.

BRK has an agreement with USG to not buy more than a certain % (I think it is 40%) of the company before (again IIRC) 2010. Another German company recently bought a large percent of USG in the mid 30's. (Karin S. can probably name this company and give a good analysis of why they bought USG.) This gives me a clue that somebody will buy USG in toto within the next 2-3 years and if it is Buffett/BRK, it will be at a fair price for existing shareholders.

None of this is a recommendation to buy at current prices, but it is a reason to own this company. As a famous investor said, price is what you pay, value is what you get. Buyers now will probably have the opportunity to buy lower later, but even more later, I think they will be richly rewarded. Buy today at $33 or in the near future maybe less than $30, doesn't matter to me. It is a good value now. If you or anyone else want to see if it breaks the 52 week low of 29.71 before buying, you'll be getting a great deal.






Guru Discussed: Warren Buffett: Current Portfolio, Stock Picks
Stocks Discussed: USG,
Rate this post:

Rating: 0.0/5 (0 votes)



Re: Buffett's USG Bet Hits a Wall
Posted by: Gangstarr (IP Logged)
Date: June 19, 2008 02:40PM

I think you need a Net Asset Value (NAV) model for this one. I recall Whitman Buying into USG at prices that are somewhat higher than todays based on the premise that the NAV of USG was higher. I don't think DCF is the right approach at the moment. Let's try to come up with a NAV value for it.

Also, no offense to Bud as I'm sure his book is great, and I will check it out Bud, but why can't Billy promote his book if others can?



Guru Discussed: Warren Buffett: Current Portfolio, Stock Picks
Stocks Discussed: USG,
Rate this post:

Rating: 3.4/5 (5 votes)



Re: Buffett's USG Bet Hits a Wall
Posted by: harison (IP Logged)
Date: June 19, 2008 04:17PM

One way to look at cyclical stocks is to use the P/S multiple. Judging by its history, USG does not present a compelling valuation here at all. I argued with someone last year who thought USG was cheap compared to normalized earnings, but those normal earnings assumptions came from bubble times.

Looking at the business, there is a 10+ month supply of unsold homes on the market. Where is the demand for USG's products going to come from to drive earnings if there is already a glut of their product on the market in those homes? USG is dead money for the next couple years at best, at worst it has a good bit more downside. This is one I'm sure Buffett would like to have back.

As for those who say they hope the price goes down, be careful what you wish for. People who want to emulate Buffett, and I made this mistake to, forget that you are in this game to make returns. You don't do that by sitting on dead money or big unrealized losses for years at a time.



Guru Discussed: Warren Buffett: Current Portfolio, Stock Picks
Stocks Discussed: USG,
Rate this post:

Rating: 1.0/5 (1 vote)



Re: Buffett's USG Bet Hits a Wall
Posted by: David Pinsen (IP Logged)
Date: June 19, 2008 04:34PM

A common sense observation of the relevant macro-trends (in this case, the biggest real estate bust in history) would tell you that there's no rush in buying USG now, no matter how good a company it is. It will probably get cheaper in the next year or two, and you can probably buy it later at a lower price.

Stockdoxc has been right on this one. But since Stockdoxc doesn't look at macro trends, and instead relies on past earnings multiples and forward earnings estimates, which should (but don't always) incorporate macro trend data, he avoided this one but bought other stocks facing negative macro trends headwinds (e.g., RUTH, the trucking company, etc.).



Guru Discussed: Warren Buffett: Current Portfolio, Stock Picks
Stocks Discussed: USG,
Rate this post:

Rating: 5.0/5 (1 vote)



Re: Buffett's USG Bet Hits a Wall
Posted by: Evan (IP Logged)
Date: June 19, 2008 06:34PM

Dave,

Can you justify "it will probably get cheaper in the next year or two, and you can probably buy it later at a lower price, " with an argument? Just curious.



Guru Discussed: Warren Buffett: Current Portfolio, Stock Picks
Stocks Discussed: USG,
Rate this post:

Rating: 0.0/5 (0 votes)



Re: Buffett's USG Bet Hits a Wall
Posted by: David Pinsen (IP Logged)
Date: June 19, 2008 09:03PM

Evan,

The argument is based on the macro trend: the largest real estate bust in decades, if not ever. Huge trends don't reverse themselves in a matter of months; it will probably take at least one or two years for the glut of housing inventory to be worked off. As long as there's a big inventory overhang, there won't be much demand for new construction; without new construction, not so much demand for sheet rock.

By the way, SHLD is probably going to keep getting cheaper too, over the same time frame, due to a macro trend as well: the ongoing weakness of the U.S. consumer due to the 'four horsemen' as I have described them: high debt levels, negative wealth effects due to the real estate bust and the stagnant stock market, less access to credit, and high energy costs. The few retailers that have succeeded in this environment have been the lowest-cost ones, e.g., WMT and COST. SHLD can't compete with either on price. It's possible, I guess, that Eddie Lampert will pull a rabbit out of his hat and monetize the real estate or brands in the next year or two, but a more likely scenario IMO is that he'll let the stock drop and then take the company private, and maybe he'll sell the real estate in five or ten years.



Guru Discussed: Warren Buffett: Current Portfolio, Stock Picks
Stocks Discussed: USG,
Rate this post:

Rating: 0.0/5 (0 votes)



Goto Page:  Previous123456Next
Current Page:2 of 6


Sorry, only registered users may post in this forum.

Please Login if you have an account or Create a Free Account if you don't
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat

{{numOfNotice}}
FEEDBACK