Investment Jungle

Investment Jungle reader Kris requested that we have a look at USG Corporation which trades on the NYSE under the symbol USG. Let’s see if Kris has found a Rule #1 stock.

Company Profile:

From Yahoo Finance

USG Corporation, through its subsidiaries, engages in the manufacture and distribution of building materials worldwide. The company manufactures and markets gypsum and related products in the United States, Canada, and Mexico. These products include gypsum wallboard, lines of joint compounds used for finishing wallboard joints, lines of cement board and accessories, lines of gypsum fiber panels, lines of poured gypsum underlayments, and various construction plaster products.

Market capitalization is $3.80B.

Fundamental Analysis:

Well, I can see that this is going to be an interesting analysis! Looking at the return on invested capital, everything looks good early on. I can see ROIC increasing from 19.6% in 1997 to 62.4% in 2000. It then settles back down into the 20% to 30% range. And then BAM! A big negative 556% ROIC! In fact, in 2005, USG had a negative book value.

Of course, the return on equity clearly shows this same issue. The 10 year average ROE is 23.94%. The 5 year rate is -8.02%. In 2005, the ROE was -173.66%.

For equity growth rates, we calculate those by looking at the book value per share. Unfortunately, with that negative book value in 2005, it makes it difficult to calculate the rates of return over those various time lengths. This is going to make it hard to calculate a sticker price without the historical equity growth rates to estimate a future EPS growth rate.

Earnings per share growth rates have been all over the map. Four of the 10 years have negative growth rates. Three of the years have more than 100% growth rates. The 9 year rate is 7.61%. The 5 year rate is 50.91%.

Finally, some numbers with a bit of consistency. The sales growth rate over the 10 year period is 6.82%. It increases to 12.82% over the last 5 years. And gets better still over 3 years at 16.33%. Last year’s rate was 13.06%.

Cash flow growth rates revert back to the roller coaster ride. Four years of negative cash flow growth rates. Two years with over 60% growth rates.

Rule #1 investors look for consistency in the Big Five and preferable a nice up trend.

Stock Analysis:

For fun, let’s put a sticker price on this one. Since I don’t have the equity growth rates to estimate my future EPS growth rates, I thought that I would just assume that the analysts are right with their forecast of 10% and I’ll even use the current P/E of 10.42. I would think that this is a best case scenario.

With this information, the sticker price works out to $25.92. At a current price of $40.44, Mr. Market is demanding a premium of 56%.

See my USG calculations.

Here is the 1 year stock price chart:

You can see that this stock has tanked over the last year from a high of over $110.

Conclusion:

Well, I would argue that this is not a Rule #1 stock because of the fluctuations in its Big Five. I am not sure what happened in 2005, and of course that should be investigated, but I can discount that and still determine that this is not a Rule #1 stock.

I believe that Warren Buffett owns USG. And I can see that USG currently has an earnings yield of 9.59% which is much better than the 10 year US bond yield. This is usually one of Warren’s measurements.

I am not sure what Mr. Buffett sees in this one, but I would pass.

What are your thoughts?

Full Disclosure: I do not own any shares in USG.

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