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No. of Recommendations: 47
Anyone else watching this one? Lord knows even value investors like Berkowitz, Buffett and Whitman have been stung by their entry prices over the years on this falling knife. For example, Buffett bought at $15 in November 2000, saw USG enter Ch. 11 and suffered quotational losses of up to 80% before getting back to his cost basis in late 2003 and ultimately doing well on his first investment of 6.5 million shares.

So even when you think its cheap, USG can get cheaper... but what the hey - here we go....

I won't go into the basics of USG as it is pretty well documented via numerous writeups on the Fool and elsewhere. Right now the industry is suffering from low demand and ramping up new plants/capacity that were committed to during 2004-2005 when the industry was at max. capacity. How does USG look compared to its competitors on plant utilization (ie - has it maintained its low-cost national competitor status?)

I looked at a recent USG presentation at a JP Morgan building products conference and used the market shares from one of the slides from that presentation to estimate each competitor's current demand. We can also estimate total annual US wallboard demand right now at 27 BSF run rate (65% utilization at 42 BSF capacity). Then I can create the following table of avg. wallboard volume per plant. (Note that my plant count per competitor may be a bit old -- so I welcome any corrections. )

Its clear from the table that the small regional guys are probably in better shape than the bigger guys are with lots of plants. USG is holding its own -- Koch in particular, but also National Gypsum must be feeling a lot of pain right now. Note that NG’s plant count excludes two recent plant closure announcements (Lorain, OH and Tampa, FL) that were announced very recently. I wouldn't be surprised to see Koch throw in the towel and retreat to its most profitable plants and significantly downsize its business as well.


BIG 3:
U.S Gypsum 17 30% 8100 476
National Gypsum 19 22% 5940 312
Georgia-Pacific(Koch) 15 10% 2700 180
CertainTeed(St-Gobain) 8 14% 3780 472
Lafarge North America 4 6% 1620 405
Eagle Materials 5 8% 2160 432
Temple-Inland 4 5% 1350 338
PABCO Gypsum 2 4% 1080 540

TOTALS: 74 99% 27000 365

Obviously, not a scientific analysis and perhaps I've made some errors in it -- but I think its an interesting look at which competitors might be feeling the most squeezed right now. With two new plants coming on-line for USG (Shippingport, PA and Stockton, CA) and one more for St. Gobain (Roxboro, NC) – there is still a lot more old capacity that the industry needs to eliminate.

The key to valuing USG is trying to nail down the average earnings power of the core US Gypsum wallboard business over time through both up and down cycles. I've taken a stab at it here. Since earnings are cyclical but growing over time - I'm going to use an avg profit per MSF of wallboard shipped as the key valuation metric.


1991 6.6 64 $ 9.96
1992 7.2 69 $ 9.64
1993 7.3 77 $ 10.55
1994 7.7 158 $ 20.52
1995 7.6 235 $ 30.92
1996 8.0 252 $ 31.50
1997 8.4 372 $ 44.30
1998 8.8 494 $ 56.14
1999 9.2 597 $ 64.89
2000 9.3 336 $ 36.13
2001 9.9 32 $ 3.23
2002 10.1 211 $ 20.89
2003 10.4 157 $ 15.10
2004 11.0 348 $ 31.64
2005 11.3 543 $ 48.05
2006 10.8 742 $ 68.70
2007 9.0 23 $ 2.56
AVG $ 29.67

Thus operating profit (includes depreciation but before interest expense -- basically an EBIT number) cycles from close to zero at the bottom of a cycle and tends to max out in the high $60s per MSF at the top of a cycle. Let's round the average earning power at $30 per MSF. Then I will just pick a benchmark shipping level of 10.4 billion sq. ft. (equal to the average of the 2001-2007 cycle. Its possible a higher number can be used for the next cycle since capacity has been added but I'll ignore that). That gives us $312 million EBIT average earning power. Tax that at 40%, slap a discount rate of 8% and grow it at 2% (shipping volumes over this two decade period grew 2.8% for USG, slightly higher for the industry at 3.5%).

So US Gypsum domestic is worth ($312 x 60%)/(8%-2%) = $3.12 Billion of Enterprise Value if valued at its average long-term profitability level per MSF shipped.

Now add Canada/Mexico Gypsum at $480 Million of Enterprise Value ($64 million EBIT, 8% discount factor, zero growth)

L&W Supply has been growing so I'll take its historical EBIT Margin of 6.1% at its current Net Sales of $2.3 Billion and come up with normalized EBIT of $140 million. That get's me to an Enterprise Value of $1.40 Billion (8% discount, 2% growth in-line with US wallboard).

Ceilings is also growing so I'll use historical EBIT Margin of 8.1% margin at current Net Sales of $800 million for an Enterprise Value of $550 million (8% discount factor, 1% growth).

Finally - there's around $100 million of corporate costs that reduce Enterprise Value by $1.0 Billion (8% discount factor, 2% growth - in line with US wallboard business).

So totalling it all up:

US Gypsum $3.12 billion
Canada/Mexico Gypsum $0.48 billion
L&W Supply $1.40 billion
Worldwide Ceilings $0.55 billion
Corporate ($1.00 billion)

less: Long-Term Debt ($1.30 billion)
Less: Other long-term liabilities ($0.60 billion)

Shares Outstanding 100 million
Value Per Share $ 26.50 per share

I think your mileage may vary (and frankly, I was a bit surprised by my low equity valuation as I went into this thinking USG was cheap) but I've tried to provide some data so that everyone can crank their own numbers to come up with a quick-and-dirty value for USG. Hope this helps.

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