“Be greedy when others are fearful” — Warren Buffett
U.S. Gypsum is the company of interest and it is a sheetrock producer that's 20% owned by Warren Buffett. The company had filed for bankruptcy in the early 90's and also in the mid 2000's as it settled its asbestos claims. U.S. Gypsum, along with other housing related companies are feeling the pinch of the housing collapse, but U.S. Gypsum's balance sheet has been under pressure before. The early 90's is much more comparable than its recent bankruptcy so I’ll differentiate that period and the present one here.
This Time Is Different
Until it's leveraged buyout in the late 80's, U.S. Gypsum held an impressive earnings track record that was positive every year from 1901. But as the company was loaded up with debt, excessive interest payments proved to be far too smothering. In the early 90's U.S. Gypsum paid in excess of $300 million in interest payments, bleeding their positive operating earnings to a loss.
From 1990 until 1994 the company suffered net losses and would file for bankruptcy in 1993. The bankruptcy followed a restructuring of debt where the company would pay less than $100 million in interest expense. Even today with revenues which are much higher than they were in the 90's the company still is paying less than $200 million in interest expense.
What also is different today is that the company is unprofitable at their operating margin. In the 90s the company was still able to be profitable in operations, but today’s environment is far more challenging than it was then. Even in 1993 annual housing starts were running at 1.2 million. Today they are running at around 600,000.
Bankruptcy Could Be a Possibility
The company has suffered losses since the start of the financial crisis. Its equity base has dwindled from above $1 billion to some $500 million. In a recent conference call the company clarified its finances:
“Turning now to cash and debt, we are very satisfied with our liquidity position. You can see the numbers in our financial statement. At June 30, we had cash, cash equivalents and marketable securities of $725 million, and we had nothing borrowed on our revolving credit facility. When you include the borrowing capacity on our credit line, we had total liquidity of $923 million.”
However, in the unlikely event that the housing slump is more protracted, U.S. Gypsum’s narrow equity slice would be in jeopardy.
The Housing Market
The housing market is very slowly picking up from its nadir. Equally reassuring is the growth in household formations. The below chart is from the National Association of Home Builders. On the left axis you see new household formations. The historic average has run about 1.2 million per year and this year is about 600,000. Household formations are the demand side to new household construction. In the mid 2000s housing starts eclipsed 2 million while new households ran just over 1 million.
The reason household formations contracted is fairly intuitive. As people move in with in-laws or family members, the number of households contracts. As people move out and find their own places household formations will grow.
Floods, Tornadoes and Other Catastrophes
Earlier this year we witnessed one of our more treacherous years for homeowners and insurance companies as homes were wiped out because of natural disasters. If there is to be a winner in this tragedy it would be home builders. Homes may or may not have been insured, but if they are they’ll eventually be rebuilt with insurer capital. Though the number of homes to be rebuilt is unlikely to be a tremendous boon to home builders, companies like USG should see some increased sales as homes are rebuilt.
The Stock Price
Currently USG is trading at around $11 a share, near its 52-week low, and has fallen with the rest of the home building industry. For every home that isn’t built today, the longer term economics for the builders and suppliers gets that much better, just as long as they can make it through the slump.
Disclosure: Long USG
Josh Zachariah
U.S. Gypsum is the company of interest and it is a sheetrock producer that's 20% owned by Warren Buffett. The company had filed for bankruptcy in the early 90's and also in the mid 2000's as it settled its asbestos claims. U.S. Gypsum, along with other housing related companies are feeling the pinch of the housing collapse, but U.S. Gypsum's balance sheet has been under pressure before. The early 90's is much more comparable than its recent bankruptcy so I’ll differentiate that period and the present one here.
This Time Is Different
Until it's leveraged buyout in the late 80's, U.S. Gypsum held an impressive earnings track record that was positive every year from 1901. But as the company was loaded up with debt, excessive interest payments proved to be far too smothering. In the early 90's U.S. Gypsum paid in excess of $300 million in interest payments, bleeding their positive operating earnings to a loss.
From 1990 until 1994 the company suffered net losses and would file for bankruptcy in 1993. The bankruptcy followed a restructuring of debt where the company would pay less than $100 million in interest expense. Even today with revenues which are much higher than they were in the 90's the company still is paying less than $200 million in interest expense.
What also is different today is that the company is unprofitable at their operating margin. In the 90s the company was still able to be profitable in operations, but today’s environment is far more challenging than it was then. Even in 1993 annual housing starts were running at 1.2 million. Today they are running at around 600,000.
Bankruptcy Could Be a Possibility
The company has suffered losses since the start of the financial crisis. Its equity base has dwindled from above $1 billion to some $500 million. In a recent conference call the company clarified its finances:
“Turning now to cash and debt, we are very satisfied with our liquidity position. You can see the numbers in our financial statement. At June 30, we had cash, cash equivalents and marketable securities of $725 million, and we had nothing borrowed on our revolving credit facility. When you include the borrowing capacity on our credit line, we had total liquidity of $923 million.”
However, in the unlikely event that the housing slump is more protracted, U.S. Gypsum’s narrow equity slice would be in jeopardy.
The Housing Market
The housing market is very slowly picking up from its nadir. Equally reassuring is the growth in household formations. The below chart is from the National Association of Home Builders. On the left axis you see new household formations. The historic average has run about 1.2 million per year and this year is about 600,000. Household formations are the demand side to new household construction. In the mid 2000s housing starts eclipsed 2 million while new households ran just over 1 million.
The reason household formations contracted is fairly intuitive. As people move in with in-laws or family members, the number of households contracts. As people move out and find their own places household formations will grow.
Floods, Tornadoes and Other Catastrophes
Earlier this year we witnessed one of our more treacherous years for homeowners and insurance companies as homes were wiped out because of natural disasters. If there is to be a winner in this tragedy it would be home builders. Homes may or may not have been insured, but if they are they’ll eventually be rebuilt with insurer capital. Though the number of homes to be rebuilt is unlikely to be a tremendous boon to home builders, companies like USG should see some increased sales as homes are rebuilt.
The Stock Price
Currently USG is trading at around $11 a share, near its 52-week low, and has fallen with the rest of the home building industry. For every home that isn’t built today, the longer term economics for the builders and suppliers gets that much better, just as long as they can make it through the slump.
Disclosure: Long USG
Josh Zachariah
