Buffett Should Have Picked Owens Corning Over USG

I have been a holder of Owens Corning (NYSE: OC) for a little over a year now. I was first attracted to the company after Warren Buffett began to build a position in USG Corp. (NYSE: USG). USG and Owens Corning are very similar, as both are tied a great deal to the U.S. economy and the housing market in particular. Yet in comparing the two it is clear that Owens Corning is the better investment. The most recent quarterly report by Owens Corning reinforces this view of the company. I won’t go into the quarterly numbers in detail as a great write up, written by Todd Sullivan, can be found here. Instead I just want to talk about why Owens Corning is a better investment then USG.

Over the last several years, both USG and Owens Corning have emerged from bankruptcy protection. USG emerged first and was financed in part by Warren Buffett who bought a stake in the company to help get it out of bankruptcy court. Owens Corning emerged soon after but with far less fan fair as the company simply decided to list itself on the NYSE without doing an I.P.O. Both of these companies were forced into bankruptcy by asbestos liabilities. These liabilities, upon emergence from bankruptcy court, have been removed from both company’s balance sheets.

Both companies are heavily involved in the construction business and have as a result been beaten down by the collapse of the real estate bubble in the U.S. However, when the market turns both companies will offer considerable value to shareholders. I personally believe that Owens Corning offers the most upside potential of the two from these levels. To understand how I’ve come to this conclusion it is important to see how much better off Owens Corning is when compared to USG.

Owens Corning is without a doubt much more diversified then USG both in terms of the number of products that it offers and the markets in which it operates. While Owens Corning is certainly involved in all aspects of residential and commercial construction and renovation, it also has a composite business that has grown up out of its innovations in insulation. The media is currently doing a fairly good job of hyping up this business because of its ties to the wind industry. While the wind industry is an important end user of these products, it is most certainly not the only one.

With the firm’s recent purchase of Saint-Gobains, an international composite company, Owens Corning has managed to have succeeded in shifting its focus into higher growth international markets that well most likely help drive the company in the future. This international exposure will limit their dependence on the U.S. housing market in the future and allow the company to achieve higher margins.

The Owens Corning business that remains tied to the U.S. housing market well likely recover quicker then USG’s because of the fact that a large chunk of the company’s business comes from renovations. In addition, the company is also making a big push to convince the public that its products are energy efficient and environmentally friendly. The company’s insulation products are a great example of this as they allow homeowners to dramatically cut down on heating costs over a long period of time with only a relatively small initial investment. I would imagine that these types of products would be appealing in any economy but particularly so in one as troubled as the U.S. economy.

USG, on the other hand, is still tied to a large degree to drywall prices in the U.S. Drywall is unfortunately a largely commodity product, resulting in USG having no real pricing power. In addition the company’s products tend to be used more in new home construction. This will delay the company’s turnaround as people will likely be more willing to renovate before buying a newly constructed house of questionable value.

I hope that it is clear to you by now which company I believe is the better investment. Investing in Owens Corning represents an opportunity to out smart Warren Buffett and his purchase in the sector. I am confident that Owens Corning will outperform USG in the future and I recommend a position in the stock on any pull back if one is seeking exposure to the sector. I would furthermore not be surprised to see Buffett take a stake in the company as it is currently trading a discount to book value and represents an opportunity to become well positioned for the recovery in housing.

Disclosure: No positions

For Further Review:

Todd Sullivan's Quarterly Review of Owens Corning

Comments

[User 193947]

Hello. How was USG's emergence from bankruptcy "financed" by WB? From my understanding, USG emerged from bankruptcy in June of 2006, paying all of its creditors 100 cents on the dollar. WB started buying shares in August of 2006. Did WB strike a pre-emergence deal with USG? Thank you.

[PrudentSpeculations]

Enter your comment herehttp://nl.newsbank...

[PrudentSpeculations]

I know they paid off fully but I still think they took some money from buffett prior to their emergence. I tried to paste a link above but something didn't work, here is another one that you might find interesting.

online.wsj.com/article...

[none2]

Actually Buffett was buying USG stock WHILE in bankruptcy--for about $5 a share. A pretty good investment, already. He later backstopped a rights offering upon exit from bankruptcy, where shareholders were offered stock for $40 a share. If you didn't want it, Buffett gladly took it. No such a great investment yet, but Berkshire is basically in it forever.

[DRS]

This is the dumbest analysis of USG and OC that I have ever read in my life. Where do I even begin?

1. USG is an extremely good operator. Why? Take a look at their capacity utilization compared to competitors. Not only that, but during the past few years they have been replacing inefficient high cost capacity, with newer lower cost capacity that will show up during the next upturn. OC's management was taken aback at how severe the downturn is. They commented that they failed to close down excess capacity quick enough.

2. Pricing power - newsflash buddy, insulation is a commodity as well. While "pink panther" has name recognition, it doesnt carry pricing power.

3. They didnt purchase Saint Gobain - they purchased a unit from them, while they sold a different to them.

4. USG is only residential? Have you looked at what business segments they have?

5. You are a complete amateur. Anyone who knows a lick about this industry knows that the raw material is "gypsum" and not drywall.

You need to save this kind of garbage for the yahoo message boards

[VP ofCommon Sense]

USG has *only* been bankrupt twice. Clearly they are a model company.

[J. Durham]

If you are such a strong believer in this stock why do you not have a position in it? I find this a little duplicitous.

[User 22925]

I do have a position in the stock. Seeking Alpha didn't copy the post correctly from my blog