Seeking Alpha
Profile| Send Message|
( followers)  

USG Corp (NYSE:USG) manufactures gypsum products: wallboard ("drywall"), joint compounds, and so forth. A wallboard panel consists of an inner core made of gypsum (calcium sulfate) plus various binders and additives, wrapped in paper.

Who else makes this stuff? Georgia Pacific, National Gypsum, Temple-Inland, CertainTeed (subsidiary of Saint-Gobain SA), PABCO Gypsum, Lafarge, and American Gypsum (once a subsidiary of Centex, now owned by Eagle Materials).

Also, there is imported Chinese wallboard. Is there anything too heavy and low-value to be imported from China? I guess not.

Anyway, it is sort of a crowded industry, selling a commodity product to customers that are desperate (homebuilders and other construction), and who themselves face weak demand.

For almost two decades, the United States has built far more houses than the levels of household formation would suggest are needed. [If you are a Credit Bubble Stocks reader, I will assume that I don't need to belabor the bearish housing argument.]

I think this is relevant not only to homebuilding but also building products. Think of the wallboard manufacturers. Over two decades they have expanded capacity, adapting to a market that was building hundreds of thousands of extra houses (and other types of unneeded buildings), every year.

USG announced second quarter earnings Thursday and I still like my USG short.

Their trailing 12 months EBITDDAR is only $47 million, versus the enterprise value of $2.8 billion. Interest expense for same period was $175 million.

I question whether USG cash flow can support its $1.95 billion in long term debt (witness the interest coverage shortfall). I don't see how the market can ascribe any serious value to the equity.

Is the market expecting a big homebuilding boom? I don't get it. Buffett owns a big slug of USG but he is notorious for holding on to positions for too long.

One of my investing themes is that the current TTM is going to be a high-water mark for economically sensitive businesses, assuming a double dip where things start getting worse again.

Source: USG Corp. and the Housing Glut