USG: Great Play on a Housing Recovery – But is There a Recovery?
Sheetrock maker USG Corp. (USG), like a lot of companies that went through hell and back, is reporting crazy big profit gains lately, even though its underlying business isn’t exactly rip-roaring. The stock has headed upward, again, after a big share price drop in late July, so investors should be wondering: is there really enough going on here to pull this stock still higher? Check out this stock chart.
It’s the kind of question more investors will ask as popularity in late recovery plays grows, especially in hard-hit housing. At this point post-recession, the weakest companies are gone, but few remainders have returned to solid profitability and strong balance sheets. Demand has hardly taken off, and uncertain economic conditions make future demand iffy. The situation also makes these types of companies notably tricky to evaluate.
Consider USG, a $1.73 billion market cap company that holds about a 23% market share on the walls that go into homes and offices. The company reported an 8% rise in revenues and an incredible 180% gain in underlying earnings. That’s because, like a lot of companies tied to home construction, its comparable numbers from a year ago are pretty awful.
Actually, those huge gains disappointed the market. Forecasters had anticipated a 13% revenue gain and a 240% EBITDA gain. The revenue gains, they noted, were from higher prices for wallboard rather than selling more of it. USG shares get a slew of hold recommendations.
The company’s balance sheet also remains weak. YCharts Pro gives the company a poor score for fundamentals. USG is still losing money net, although it did report an operating profit last quarter. Paired with a high share price based on historic financials and performance, the shares get an avoid rating from the charts.
Of course, the whole idea of a recovery play is to get in just before a rebound, not halfway through one when everyone can see a pretty future. So how does an investor evaluate stock in a company that’s made progress, but still has a long way to go in a not great business climate? Forecasts for the near future financial performance seem dubious because experts inside and outside the company are, understandably, having trouble getting those right. Historic valuations aren’t particularly helpful when pitiful comparisons put the changes in financials into the triple digits. On a price to sales ratio, USG remains much cheaper than competitor Eagle Materials (EXP) -- for good reason. Although it has about the same amount of gypsum business as USG, Eagle is a more diversified company with a stronger balance sheet.
USG would benefit wildly from a big rebound in either new home construction or remodeling projects in the U.S., but the economy seems unlike to provide either quickly. There are, however, reasons for optimism. USG just announced plans to expand mining and manufacturing in fast growing India. Costs are down, and an industry-wide change in pricing strategy adopted late last year (they’ve all stopped pricing by job) should help underpin earnings for years to come. Already, profit margins are much improved.
Will those things protect USG shares from the wildness of housing sector speculation? Surely not. But they do make going up from here long-term a more likely proposition.
Filed under: Company Analysis