Author: Felix Tong
Covestor model: Long Term Core Holding
Disclosures: Long USG
In the month of May, there was only one transaction for the Long Term Core Holding portfolio. I opened a position in USG Corporation (NYSE: USG). USG is a leading wallboard manufacturer in the United States and Mexico. Late last year, USG issued a memo to its customers informing them of a price increase. Rather than slash prices to increase market share, four of its main competitors, National Gypsum, Lafarge, CertainTeed, and Temple promptly increased their prices as well. This indicates that competitors in this field are motivated to act rationally and maximize profitability. As long as wallboard competitors continue in this manner and do not pursue a protracted price war, all players in the market should do well. If a price war does ensue, USG, as the market share leader, should survive, although profitability could be hurt.
The management at USG is more of a mixed bag. This long-tenured management has deftly maneuvered through asbestos litigation, and more recently management has also been able to reduce capacity during the housing downturn by reducing headcount, closing distribution centers and lowering administrative expenses. As impressive as management has performed, however, I cannot overlook what seems like excessively generous, seven-figure executive compensation packages. This seems egregious given the losses that mounted at USG during the housing downturn.
Weighing all of the above factors, I feel that USG still merits investment at the right price. It’s in an industry with favorable market dynamics, with strong (albeit overpaid) management. New home construction has not matched new household formations for the quite some time. At some point this trend should reverse, potentially causing sales and profitability to skyrocket due to pent-up demand. In this scenario, my analysis shows that USG’s earnings power could be significantly higher. Depending on how strong the housing recovery becomes, the earnings yield for USG should also grow when more normal conditions return to the home construction and remodelling industries. With no way to predict the future, and with the market’s near broad current aversion to building materials companies, I believe now is the time to initiate an investment in USG.
