USG (NYSE (NYSE:USG)) Corporation is a leading manufacturer and distributor of high-performance building systems such as drywall, ceiling, flooring, roofing and other products made with gypsum. Strong brand name has helped USG to have more than a quarter of the US drywall market. The company operates its business in Australia, Korea, Thailand, Indonesia and China. The USA segment represents the most part of the company's total revenue.
Operations are organized into three main segments: Gypsum, Ceilings and Distribution; where 2015 consolidated net sale were for approximately 55%, 12% and 33%, respectively.
USG Boral Building Products - the fourth business segment is accounted as equity method investments and is not included in sales.
USG business is cyclical in nature and sensitive to changes in general economic conditions, including conditions in the North American housing and construction-based markets and the markets in Asia and Australasia.
During the last 52 weeks, USG has been showing good results. Its stock price has increased by 107.5%, while NYSE Composite has decreased by 2%.
The main cause for such results is the expectation of the company's positive earnings growth. The EPS has growth in 25.9 times in 2014 - 2015 (the net income increased 25.8 times because of provision for income taxes) while revenue growth was only 1.4%. However, there is no evidence that the company will continue growing in this way.
Based on preliminary data reported by the U.S. Census Bureau, housing starts in the United States increased 11% in 2015 to 1,111,400 compared with 1,003,300 in 2014. This followed a 9% increase in 2014 compared with 2013. For December 2015, the seasonally-adjusted annualized rate of housing starts was reported by the U.S. Census Bureau to be 1,149,000 units. Given the fact of rapid growth of the company's shares on expectations of market expansion, it is clear that investors face serious risks; because all of the seasonal growth factors have already been taken into account by market participants in the company's share price.
The fall in the secondary market may indicate a short-term reduction in demand for real estate, which could affect the market of new buildings. In view of the fact that installation of gypsum products into a newly purchased home typically follows in the period from 90 to 120 days, we possibly will see significant decrease in USG sales.
The average purchase price of real estate in the secondary market shows steady decline, which could potentially mean a drop in demand. And the existing dynamics of the market of real estate loans confirms this assumption.
7% fall in this indicator over the past 5 months is a serious indicator that directly affects the sales of USG.
The number of new family houses sold remains stable and in the previous context probably will show a negative trend. This situation before the start of the main construction cycle talks about a possible overestimation of the expected market growth.
External factors of slowing growth are confirmed by internal results of the company:
Among the fundamental factors we can highlight the financial leverage of USG (3.3).
Interest expenses are 43% of the company's operating income. And the ratio of FCF/Debt is 10.8%. If the distribution market will decrease in volume, the existent level of debt can be dangerous.
But from the point of view of comparative analysis USG looks good. Long-term investment in this company can bring good results. To understand the possible long term growth factors see Illuminati Investments article "USG Is One Of The Cheapest Midcap Stocks On The Market".
Given the excellent growth which the company's shares have shown for the related period, we must consider not only the "universal euphoria" and positive expectations but also the real estate market trends and common sense on the issue of company expansion. These factors allow to expect a short-term correction of prices due to the failure of expectations on the company.
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