Six Years Later, Maybe Warren Buffett is Right About USG Stock
In the scheme of things at Berkshire Hathaway (BRK.A) (BRK.B), Warren Buffett’s bet on USG (USG) shares in 2006 was a small one, costing about $536 million, and essentially giving Buffett a huge stake in the upside of the U.S. housing industry.
Homes just aren’t made without wallboard, the gypsum slabs that line walls everywhere, and USG’s Sheetrock brand dominates the market. As an investor, one needn’t analyze the home builder stocks – who’s got the best land, who’s building the most marketable shacks, who’s holding costs down best – all one had to do was go long on wallboard, and you've got a piece of housing starts.
Sadly for Berkshire holders, Buffett bought the shares near the housing market’s peak, and home building soon went into a nosedive unrivaled since the Great Depression. Still, Warren Buffett’s expert analysis should not go to waste, and as the home building industry crawls out of the abyss, USG will rise, too.
Shares of USG are up almost 200% since the depths hit last October, far outpacing the broader market.
And given that its movement tends to closely follow housing starts data, the housing recovery will lift USG along with it.
Tuesday, the company surprised Wall Street by posting a smaller loss than expected in the first quarter, ended March 31, of $27 million versus a loss of $105 million a year ago. And revenue rose 13% to $812 million – again beating expectations.
USG has still a long way to go to get back to the type of profits it enjoyed in 2006 of almost $300 million.
Wallboard is among the most cyclical of commodities, its price swinging wildly along with sales volume. USG wallboard sales topped out in the second quarter of 2006 at 3 billion square feet, and the price peaked the next quarter at $188.37 per thousand square feet, reflecting enormous pricing power among wallboard makers as home builders sought scarce building materials. Volume fell as low as 900 million square feet in the fourth quarter of 2010, or 70% from the peak. And the price bottomed out at $104.81 in early 2008, a 44% dive, illustrating the glut that follows scarcity.
USG removed a big chunk of its own capacity from the wallboard market over the past several years, but excess remains. USG figures capacity utilization is just a bit better than 50%.
Still, USG was able to realize higher prices in the first quarter despite the slack. Further, it was able to improve its results even as demand in its core markets remain at historic lows.
USG has about $2 billion in loss carry forwards it can use to shield profits in the years to come. You missed the nightmarish six years off Warren Buffett’s USG investment. Things should get better going forward.
Filed under: Company Analysis