USG Corp. -- Despite the Housing Slowdown, This One's Way Under-Valued

Includes: BRK.A, BRK.B, USG
by: Fat Pitch Financials

USG Corporation (NYSE:USG) threw a nice slow, almost perfect pitch right over my plate this week.

I have been watching and studying this stock for the past two weeks. With Warren Buffett acting as my virtual coach, I knew it was time to swing when I heard that he added more shares of USG to his Berkshire Hathaway (BRKA) (BRKB) holdings. Apparently, Buffett was buying shares between August 2nd through August 9th at prices ranging from $45.46 to $45.98. When the stock jumped to over $47, I put in an order for $46.51 and it was filled yesterday in both my private account and my public Fat Pitch Financials portfolio.

USG is the maker of Sheetrock. I did not realize Sheetrock was the brand name of USG’s gypsum wallboard, also known as drywall. It looks like the Sheetrock brand however is going the way of Xerox and maybe even Google, but I’m not too worried about that. USG’s moat is really their economies of scale and low cost producer status.

USG Corporation’s shares have taken a beating and are selling for a discount right now as a result of three main factors. First, their legal liability from asbestos cases had almost destroyed this company. As a result of their legal problems, USG filed for Chapter 11 bankruptcy protection. I believe the stigma associated with bankruptcy and the associated complicated contingency funds is also holding the stock price down. Finally, the recent rapid increase in real estate inventories and the start of a real estate slow down are also keeping away many short term investors.

Based on a rough discounted cash flows model, I’m estimating that USG has an intrinsic value between $85 and $100 per share. Given that potential margin of safety that this investment currently provides, I feel confident in having taken a swing at this fat pitch. I’ll get into more details regarding this stock purchase over the coming week.

USG 1-yr chart:

USG 1-yr