Monday, March 03, 2008


As some of you know, I am bullish about USG. It has gotten its asbestos exposure behind it. And, it has emerged from restructuring as a new and dominant player that is building its protective moat. So, for you quantitatively inclined, some of these present numbers are opportunistically deceptive. BRK owns about 20 percent of the company, up from its initial investment into 15 % of the company.

USG Corporation (USG), through its subsidiaries, is a manufacturer and distributor of building materials, producing a range of products for use in residential, non-residential, and repair and remodel construction, as well as products used in certain industrial processes. The Company's operations are organized into three segments: North American Gypsum, Building Products Distribution and Worldwide Ceilings, the net sales of which accounted for approximately 48%, 38% and 14%, respectively, during the year ended December 31, 2007. The Home Depot, Inc. accounted for approximately 11% of USG's net sales in 2007.

USG Corporation , USG has a (5-year annual average) net income growth rate of negative 11.3 . What competitive advantages does it have? Brand, Technology, Cost of Production, Distribution Network? Are possible advantages sustainable? Does USG have a solid mix of Product, Pricing Power, Placement, and Promotions? When buying companies or common stocks, look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements.

USG has a current market price is 33.18 Using an assumed growth rate of -4.5 percent, the estimated Intrinsic Value is 18.67 per share from, and there does not appear to be a bargain or 'margin of safety' present here. However, using an assumed growth rate of 7 percent, the estimated Intrinsic Value is 68.36 per share from, and this may or may not indicate a bargain of 35 dollars. Is it a possible Value Trap? If the growth assumptions used in estimating the Intrinsic Value are accurate and sustainable, this may or may not indicate a price-to-value ratio of .49 , and a possible margin of safety of 51 percent.

The current price/earnings ratio = 42.6 It's current return on capital = 2.09. Using a debt to equity ratio of .56, USG Corporation shows a current return on equity = 4.12

Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding. Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.

Automatic Warning, ( above 0.5 ) on this current debt to equity level of .56

Does USG Corporation make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today? Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is USG the best place to invest our money today? What about growth in Free Cash Flow?

Excerpts, comments, and news items:
Portions of this report are generated in budlab software on 08-03-03 . Budlab software was designed to help me produce a report that emphasizes conservativism and rationality when making an investment decision.

No comments: