In this report from the second quarter four years ago, we wrote the following about USG (USG, Financial): “New holding USG is the largest producer of wallboard in the U.S. and a leading manufacturer of other building products. After spending five years in bankruptcy related to asbestos in the early 2000s, USG finally reached an agreement to emerge -- with its equity intact -- on precisely the same month in 2006 that housing starts entered one of the deepest and longest downturns in U.S. history. Nine years later, housing starts are still significantly depressed relative to trend and USG’s profits even more so. It’s no surprise that investors aren’t tripping over themselves to buy shares of USG. But looking further out, as housing and other construction markets fully recover, we believe USG will be earning considerably more and producing substantial free cash flow, as the company benefits from large tax assets which help to shelter earnings.” When we invested in USG, we were completely unfamiliar with Knauf, the privately held German company that recently acquired USG. Knauf’s management saw its business as complementary to USG’s and the company also recognized the undervaluation in USG’s share price. As it happened, Knauf roughly agreed with our understanding of the intrinsic value of USG.
From David Herro (Trades, Portfolio)'s second-quarter 2019 Oakmark Funds shareholder letter.
