I have not written a Chasing Value post for quite a while because I could not find anything to brag about for a couple of weeks, but then I found something hiding in plain sight.
Few things are more plain and simple than drywall. The same can be said for the purity of this stock from a value perspective. I have been watching USG Corp (NYSE: USG) for a while and today I bought it for $52. I should have bought it last week but other priorities prevented it.
Looking at the stock fundamentals I did a double take because it all seems too good to be true. Starting with the following chart, I remind readers that I am not a technical analyst and don't believe in it, however I do look at charts for two features that are best represented graphically and allow you to see the story quickly.
As a value investor I like to buy stocks that fall below their mean, that way I can make money on the reversion to the mean without any fantastic earnings reports or promising story. The other thing I look for is a stock chart that reflects an overly pessimistic view by the majority of investors for what is a short term and not intrinsic problem with the stock. For example in the case of USG, there is nothing wrong with being in the drywall business (it's not wagon wheels) it's just a temporary difficulty caused by the downturn in housing. You can see this stock has been badly shaken down from a high of about $115 to its current $52.
I think this stock is way too cheap. In the case of housing companies, yes their business may have been cut in half, but that's housing companies. This company still has commercial sales and other aspects of its business still moving product. If the housing stocks have been cut in half then USG should have been something less than half but as you can see it overshot the mark to the downside. It also had problems with potential asbestos claims which drove it into bankruptcy, from which it emerged last year.
Now for some value-like metrics: The P/E is 7, the P/S is .56, the P/B is 2.79 and if that does not blow you away you can pick up USG at a price-to cash-flow (P/CF) of 1.82. Can this be right? This seems like a misprint, but that's what it said at AOL Money and Finance.
It gets even better, the largest shareholder is Berkshire Hathaway Inc. (NYSE: BRK.A), so if I'm going down, so is my "pal" Warren. And what does Warren Buffett love to present to his shareholders? RETURN ON EQUITY! Buffett often speaks about creating shareholder value. So what is the ROE for USG: 73.86 (TTM) or ten times the P/E. Since both are trailing numbers it is a fair comparison. I do not recall seeing this before so bless his heart, he is on to something -- again! Anybody thinking Buffett might buy the rest of the company?
Given the interesting metrics posted on AOL I decided to look elsewhere to verify some of the data. However, I only received confusing information. According to one of my brokers at Vanguard, (I trade online but use Vanguard for information) Bloomberg indicates a N/A for ROE and checking the most recent Standard and Poor's report on USG dated May 26, 2007 the ROE is listed as 46.75, still incredible but lower than AOL stated. The other figures appear to be in line with AOL.
Since I mentioned S&P, I should also mention that it is not a fan of this stock, giving it a quality ranking of C on a scale of D to A+ and the lowest fair value ranking of 1 on a scale of 1 - 5. I guess it does not like the stock and I usually hold S&P reports in high regard -- it has a great track record. On this one, however, I think I will have to buck the crowd.
I am also bucking my own basic investing fundamentals in one regard and that is dividends. Ninety percent of the time I will not buy a stock that does not pay a dividend, but USG only last year came out of bankruptcy so I will give it time and go against the grain here too.
Those of you who are new to BloggingStocks can check out my other stories and read Chasing Value or Serious Money to find more potential opportunities and verify my track record as well.
Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm. Check out his other posts for BloggingStocks here.
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Reader Comments (Page 1 of 1)
5-29-2007 @ 4:16PM
rxwiz said...
Hi Sheldon,
Your articles today are right on. I agree, there is a lot of room for increasing the value of the stocks shown. You picked some beauties.
Take care,
Dr. Gene
5-30-2007 @ 1:16AM
hflash said...
I may be missing something here but I think the share price graph is misleading. The reason the stock fell back so much was a 1:1 rights issue at USD 40, which doubled the number of shares in circulation. The market cap of the company is pretty much the same today as it was at the high of 115. So the perceived fall in the share price is not a real reflection of a fall in the value of the company
5-30-2007 @ 8:19AM
hflash said...
SHELDON,
Not sure I agree with you there (i'm by no means a pro but have been following this stock for over a year, so would be interested to see your take). My understanding is that the p/e is based the previous 4 quarters EPS, when USG release the next quarterly results, Q206 Eps of 3.03 will be kicked out to be replaced by EPS in the region of 0.85 (consensus for Q207). This will mean the p/e shown will be in the region of 13x. I still think this is a good company long-term, but i'm not sure it is the fat pitch people are making it out to be. As you say in your article the fundamentals look 'to good to be true', in my experience that usually means they are. Let me know what you think.
5-30-2007 @ 10:43AM
tom said...
I had owned USG when the came out of bankruptcy in 2002? I bought it very cheap and then let it ride and made a good buck.
Glad to see that they have straightened out their latest problems and are back on track.
You're right that you cant get more basic than drywall. Someone is always going to need it.
Tom
5-30-2007 @ 11:04AM
Sheldon L said...
HFLASH,
The stock reached a peak 4/24/06 with an intra-day high of a 117.24 and WAS affected by a stock offering to shareholders, however "...adjusting for the doubling of shares outstanding a result of an offering to help finance a $4 billion asbestos trust fund). If the stock were to sell again for 15 times future earnings its historic average it could command a price as high as 90." from Barron's Online.
The capitalization is distorted by the removal of the $4B trust fund money. But it is more affected currently by the P/E being half of normal. The stock decrease in value is real and the shareholders REAL equity went to the trust fund a one time (albeit huge) event which is why the capitalization appears not to have changed much.
5-30-2007 @ 12:33PM
Sheldon L said...
Thanks for your comments hflash you raise some great points.
First let me appologize to readers and those leaving comments because they sometimes appear out of order for reasons I have yet to determine, but I am checking.
You are right about the P/E and I would not be surprised to see USG possibly dip further before it's rise. There is a reason the trailing figures are used more often...the past is easier to predict than the future...no joke...everything going forward is speculation...at best educated guessing.
There is plenty of bad news figured into the price and they have several initiatives in place to turn things around.
It is possible this stock could languish for a while, even years, but if it took three or four years to get back to where it was that would be a pretty healthy return and I do not think it will take that long.
I try to stick to fundamentals and not make predictions. But I can name ten stocks that I missed the boat on because I waited for a price it never hit and I'm sure you can do the same.