I recently completed a discount cash flow analysis of USG. Many of you may know that Berkshire Hathaway owns 19% of USG, which was the catalyst that triggered by initial interest (and purchase of USG last year).
At the time I did a quick DCF and determined that USG was almost 20% undervalued. The recent release of USG's 10K provided a good opportunity to review my DCF and revise my write up.
The stock was also the subject of a presentation by Whitney Tilson at last fall's Value Investor Conference in New York. Tilson's enthusiasm surpasses mine, primarily due to the fact that my valuation model prices in a large decline in the gypsum wallboard market due to a decline in housing construction that Tilson's USG model does not.
That's right, USG's primary product is Sheetrock, the top wallboard brand in the world and the biggest use of that product (45% of revenue) goes into new home construction and yes, new home construction is going to be weak. However the fear this decline inspires in investors, coupled with USG's messy financial statements (due to a recent asbestos and bankruptcy settlement) have lead to a cheap price for the stock, so cheap that I am willing to tough out a housing decline.
Take a look at my write up and model and let me know your thoughts, USG is currently my largest stock holding and I'm interested in feedback.
USG Write Up
USG Valuation Model
Timothy Burger
timothyburger(at) gmail.com
6 comments:
1) Does your $1.49 BB debt take into consideration USG's recent tax refund? I believe the post-refund debt number is a lot lower, something like $900 MM (even with the recent CalPly purchase).
2) Do your L&W revenue projections consider the 28 additional stores acquired mid-2006? L&W sales for 2006 were $2.5 billion, or $11.36 MM per store. What about the CalPly purchase ($600 MM in 2006 revenue, or nearly $20 MM per store)? I think your L&W assumptions are too light given these acquisitions.
3) Do your projections take into account the additional approx 2-2.5 billion in wallboard capacity USG is adding in 2007, 2008 and 2010?
Excellent questions.
1) The $1.49 billion is the final long term debt number after the recent tax refund, USG had a tax bridge loan on their balance sheet under current liabilities that will be paid off with the tax refund.
2,3) The model probably understimates both the growth of L&W and the operating imporvements gained from closing high cost capacity and opening new, low-cost lines for wallboard, but I felt like it was better to be conservative heading into tough times for the company.
1) You're still off because of quite a few things you're not cosnidering. The tax inflow and outflows from the 524g is fairly complicated because of the timing difference on the 2 sepearate payments of $900 million and $3.05 BB and the fact that its a large carryback and carryforward as well -- so you've got to follow all the relevant tax assets and cash. Nevertheless, look closely at the balance sheet as of 12/31.
Income Tax Receivable -- $1.102 BB
Cash .571 MM
Deferred taxes -- ST .169 MM
Deferred Taxes -- LT .171 MM
TOTAL $2.013 BB
ST Debt -- $1.065 BB
LT Debt -- $1.439 BB
TOTAL $2.504 BB
Difference -- .491 MM
CalPly purchase .280 MM
Total Net Debt .771 MM
Your number is $700 MM too high. And USG still has plenty of room for more L&W additions this year as well should opportunities arise.
2) Fair enough.
3) USG isn't simply taking out high cost capacity (recent 400 msf). They are growing the wallboard business in line with the industry's 4% average CAGR.
I'll read your write-up a little closer but overall I think you did a very nice job!
Anonymous,
I think we are just looking at the debt from differnet perspectives.
You are talking about a net debt figure (subtracting all of the cash and tax assets), I am talking about the gross long term debt number. You will notice that I did add back my estimate of excess cash (only $200 mil of the total) in the valuation.
The issue of raising wallboard capacity is a tough one for me. I know they are growing capacity (I incorporate higher capex than the company has outlined) and that announced industry capacity additions are in line with long term growth, but since the industry was almost at capacity earlier in the year, I'm not sure what the supply / demand balance will be, so I tried to make conservative assumptions that I thought could play out if conditions were less than optimal.
I would not be surprised if USG grew sales faster than I model especially at L&W or, even more likely, improve margins due to more efficient production, but in this valuation I wanted to create a significant margin of safety.
Great comments, you really seem to know the company, do you have an intrinsic value estimate for the stock?
Fair enough. I just think net debt is a better number when trying to come up with a realistic valuation. The difference between our approaches is $7-$8 to the Common.
On a different note, Wallboard Pricing:
We are six months into a brutal downdraft in wallboard demand, yet pricing has stayed remarkably firm.
4Q 2005 Avg. -- $155.38
1Q 2006 Avg. -- $170.77
2Q 2006 Avg. -- $182.65
3Q 2006 Avg. -- $188.37
4Q 2006 Avg. -- $181.75
http://investor.usg.com/downloads/PriceVol.pdf
USG, EXP and TIN have all remarked publicly that they are producing to demand, not capacity. This is completely unlike the last wallboard cycle when price wars broke out because new entrants were trying to take market share. USG responded in kind by producing way above demand. Further, there were 11 market participants during the last cycle. This time there are 8. Thus far, things look a lot different from last time. We'll see.
Finally, have you looked into all the many building materials buyouts that have occurred recently (e.g. ELK; St. Gobain/BPB; FRK; GP/Koch; LAFarge/LaFarge North America; LaFarge's roofing business; etc.)? Many went out at 9+ times peak earnings.
Exactly, I think the Koch / GP deal was at 10.5 times near peak EBITDA, USG is cheap even with the most conservative assumptions.
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