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USG Corp (NYSE:USG) is a leading distributor and manufacturer of construction products for both residential and nonresidential construction, repair, and remodeling. The most important of these products are USG's SHEETROCK brand gypsum drywall/joint compound and other associated construction products. Most of USG's revenues come from the United States (77% of revenues) and Canada (12% of revenues). The last recession severely damaged the profitability of USG's drywall business. However, with the recent improvement in the U.S. housing market, USG is seeing some significant improvement in its drywall business. In 2012, USG experienced its first increase in drywall unit volume since 2005. Also, in 2012, USG was able to raise drywall prices (17% increase over 2011) for the first time since 2006. Both of these milestones bode well for USG's future profitability as the U.S. housing market continues its slow but steady recovery.

We believe that much of this improvement is from residential remodeling and repair activities. Many homeowners have delayed selling their homes waiting for a better real estate market. In our opinion, that improved real estate market has arrived and many homeowners are remodeling and repairing their homes in preparation for putting them on the market. Also, the market for new houses has been steadily improving and this trend should help sales of drywall for new residential construction. Based on recent trends, we believe that USG will return to profitability this year and will earn about $.85/share in 2013 and $1.65/share in 2014.

In terms of valuation, we believe that USG is a good value at $25.99/share for the following reasons:

  1. Warren Buffett's Berkshire Hathaway is the largest shareholder of USG shares with a 15.73% stake in the company.
  2. USG has a solid balance sheet with $494 million in cash.
  3. The median 12 month price target for USG is $33.00/share
  4. S&P has a Strong Buy rating on the stock (5 out of 5 Stars) and a 12 month price target of $40.00/share.

Disclaimer: We are not investment advisors. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.

Source: We Believe That USG Is The Place To Be