USG Corporation Reports 2012 First Quarter Results

"USG Corporation, a leading building products company, today reported first quarter 2012 net sales of $812 million, up 13 percent from first quarter 2011 net sales of $721 million. USG's first quarter operating profit was $27 million compared to a $58 million operating loss in the first quarter of 2011."

USG Corporation (USG) Reports 2011 Fourth Quarter and Full Year Results

Yet Another Quarterly Loss:

The corporation’s adjusted operating loss was $37 million in the fourth quarter of 2011, which compares to an adjusted operating loss of $39 million in the fourth quarter of 2010.

No position.

I think the wallboard industry is a joke, but the housing bulls have convinced themselves that the market is recovering (same as every year since 2007), and I do not want to stand in their way.

USG Corporation Reports Third Quarter 2011 Results ($USG)

From today's press release with Q3 2011 results:

[T]hird quarter 2011 net sales of $792 million, an operating loss of $76 million and a net loss of $115 million, or $1.09 per share based on 105.3 million average shares outstanding. In last year's third quarter, net sales were $758 million, the operating loss was $58 million and the net loss was $100 million, or $1.00 per share based on 100.1 million average shares outstanding.

"Many of our key markets continue to experience recessionary levels of demand that are near record lows," said James S. Metcalf, President and CEO.

Stockholder's equity fell to $375 million. Market cap is $831 million, for a price-to-book ratio of 2.2x.

Credit Markets Are Not Confirming the Equity Market Rally (Short Squeeze)

When equities go up or down - whether single companies or as a class - bonds are supposed to follow, because both sets of prices reflect an embedded set of assumptions about companies' profitability and solvency. Any exception, or divergence, from this rule is noteworthy because it means that either the equity investors or the bond investors are making a mistake.

Since the low on October 4 there has been an 11% jump in the S&P 500 and closer to 17% in the Russell 2000. But the enthusiasm hasn't really carried over into the distressed corporate credits that I follow. I have two good examples of this.

First is USG Corp, our favorite manufacturer of wallboard. The market cap is $900 million but the company has $1.7 billion in net debt. Over the past twelve months they have earned a paltry $43 million in EBITDA, versus an interest expense of between $150-200 million. As cash gets burned, tangible book value is steadily declining, leverage is increasing, and the bond yields have been rising. All the symptoms of a company that is going to be restructured with more equity ownership going to bondholders.

Since the October 4 low, USG common has rocket up almost 40 percent. Meanwhile, the company's 6.3 percent notes due 2015 have not really budged, continuing to trade in the low 70s with lackluster volume. The wallboard industry added so much capacity during the housing bubble that they can probably only achieve profitability during bubbles now.

Second example is uranium enrichment company USEC (USU). This is a long story but the company is distressed because it has been in limbo on a $2 billion DOE loan guarantee needed to complete a massive new uranium-enrichment plant in Ohio. It's unclear why the DOE would be stonewalling, but that seems to be what is happening.

Just today, the USU common shot up over 50 percent! But the company's three percent note due 2014 was basically unchanged from its mid-50s level, and not that many bonds changed hands.

This is all typical of the structural stupidity (excessive optimism) that we see in the equity market. But it also suggests that the equity moves we are seeing are short squeezes and not fundamentals-driven.

"It's Friday, Friday" Links

Internet Bubble

• P, LNKD: "Both stocks are below what traders (I don’t think many investors got involved here) could buy them for on the open market. Both are also still massively overpriced and have much further to fall."
• Ballsy Pandora Analyst Has Guts To Say "SELL"
• Falky: "whenever there are options available on stocks that are hard to borrow you have a large number of investors behaving suboptimally"

Trade Ideas

• The USG Corp 6.3%s of 2016 have fallen from 97.5 to 92 since the beginning of June - losing almost a year's worth of interest. Meanwhile, the stock is flat. One of these things is not like the other...
• Great long/short energy idea: "A practical trading application of this strategy would be to long a cost leading solar pv company and short a cost lagging solar pv company."

Other Reads

• Great KK article: "The Clock in the Mountain"
• For a New Liberty: The Libertarian Manifesto - Murray N. Rothbard

Incipient Crash

• "My personal history in Chess is only here to describe when one should give up. My view is that the EU should give up on the Euro, and plan now for its demise, going back to individual currencies for each nation. The experiment has failed. Topple the King."
• Art Cashin Compares This Week's Action To The Days Before Black Friday.
• Angry bull: "It must feel good to know that your cynicism and just-prudence is now paying dividends. Just know that betting against the market and the men with guns only works for so long. The game is rigged against the rational, the libertarian, the Austrian." Hmmm.. I guess the game may be "rigged against" me, but it hasn't stopped me from making money...

Thursday Links

Pandora should be trading at $2/share, tops "Let me continue my generous streak and say that Pandora might be a reasonable gamble at $2/share, tops. That would still value a company that’s never seen a dollar of profit in its decade-long history at almost $320M (~160M outstanding shares at the moment). An astonishing, princely sum for a promise-of-a-perhaps profitable business in the future."

"At some point, the weakening economy will funnel down to earnings. And valuations are not so good this time, compared to summer of 2010. There is a LOT less margin for error."

WSJ: "USG and its biggest rivals—including privately owned National Gypsum Co.—built new plants as the housing market boomed from about 2000 to 2006 and have about twice as much U.S. capacity as they can use at today's deeply depressed level of construction."

"[T]he Greek state - whose reach was never far into society - is beginning to lose its grip slightly on the actual functions a state should do."

"In a market that is flattish for the year those are the type of numbers that lead to redemptions. Paulson’s funds under management were as high as $38 billion. There is no room for error with those types of numbers."

ZH on the collapse in Philly Fed index: "all those buying stocks in advance of more easing are completely forgetting that they will take major losses before the market is low enough to allow actual easing to proceed."

USG Corp Down 5% on Weak Earnings

The company posted a net loss for the quarter ended March 31 of $105 million, or $1.01 per share, compared to a loss of $110 million, or $1.10 per share during the same period last year.

Gary North on Warren Buffett

From his latest essay, When the Insiders Lose Control:

The symbol of this train wreck is Warren Buffett. His outfit bought newspapers. [I like how Gary North refers to Berkshire as "his outfit".] It owns a chunk of the Washington Post. He recently resigned from the board of the Post. But he assured people that he will never sell shares of the Post. A columnist on the Motley Fool had some comments on this statement. He quotes Buffett from two years ago.

Twenty to 40 years ago, [newspapers] were essential to customers and advertisers. They had pricing power, but [it] essentiality has eroded. Erosion accelerated dramatically, and it won't end based on anything on the horizon. We do not see anything to reverse it. They are essential to advertisers only as long as they're essential to readers. Ten years ago, the head of The Buffalo News said that on an economic basis, Berkshire should sell The Buffalo News. We could have sold the business for hundreds of millions. Not so today.

The writer went on to say that Buffett has always bought companies on this basis: he will not break them up. He buys to hold. I can see the logic of this. But that logic has trapped him. He owns big chunks of sinking ships made of newsprint.

The strategy of the Insiders has always been to control the flow of information. Because of the cost of entering the various fields, those without a lot of capital could not get in. Mergers and acquisitions went on for 50 years until the Insiders controlled the whole shebang.

I have long thought that Buffett's biggest weakness is a lack of sell discipline. I have written about this in the context of our USG short:

There is no information content in a Buffett holding as opposed to a purchase, because he basically won't sell no matter how bad things get. Examples: Moody's (discredited by their mortgage security ratings), Washington Post and Gannett (dying industry), USG Corp (down hugely since most of his purchases, why hold through a housing crash?), General Electric (turned itself into a bank making risky commercial loans)

There are obviously things I like about Buffett, but I am a skeptic. I wonder whether there ever been a case where Buffett recognized a problem in an industry and completely sold his holdings or went short?

He is in the complacent, "rah-rah America" class of investors who think that because the baby boomers lived such pampered lives, misfortune has been permanently banished from history.

I think some of these deficits could stem from Buffett's mental models of America (and Goldman Sachs, and the newspaper industry) not incorporating the changes that have occurred since the 1950s.

Another name that I think Buffett will end up riding over the peak and all the way down into the ground (if he lives long enough) is Coca Cola. His enthusiasm for Coca Cola has always bothered me. What happens to Coca-Cola if more people switch to paleolithic diets? What happens if people get sick of its habit of filing amicus briefs in politically sensitive cases?

USG Corp (USG): "We View 2011 as Another Tough Year" - So Why All the Excitement?

Comments from the USG Corp (USG) earnings call:

Looking ahead, I remain optimistic that the demographics will again stimulate demand for our products and services. People will get married and start families, the U.S. housing stock continues to age and world economies will grow, all of which will stimulate meaningful demand for our products and services.

They obviously don't have too much insight into the demographic problems facing the U.S. and the rest of the western world. Someone needs to tell USG that the baby boomers forgot to have children and are going to be selling houses and stocks into a declining market for the next couple decades.

But we feel that we are in the final stage of one of the worst market downturns our industry has ever seen.

The optimism during the first quarter about our recovery faded and the year basically ended up sideways.

We view 2011 as another tough year.

Hmmm... doesn't sound promising. [See the Seeking Alpha transcript for the rest.]

Tuesday Links (CRM, USG)

Anti-value

• Salesforce.com (CRM) "shades of the dotcom bubble... Its shares are amazingly expensive, when weighed by traditional valuation metrics. So analysts have come up with creative ways to gauge its results."
• Case-Shiller: U.S. Home Prices Keep Weakening as Eight Cities Reach New Lows in November
• Dilbert on Marginally attractive opportunities
• Home Builders' Shares Rise, Home Building Doesn't. The rally in USG Corp (USG) shares has been simply amazing given the plunge in single family home starts.

Social Mood

• You can't fix stupid: "Americans’ optimism has surged to nearly a four-year high — jumping 14 points in the past month alone" What we are experiencing right now is an amazing peak in optimism, years after the peak in fundamentals.
• Socionomic Trendspotting for 2011
• Wasting money at Davos. The key to Davos is going with other people's money - preferably the idiot shareholders of your Fortune 500 company, or your subjects' citizens' money.

Competition

• Jim Simons, the math Ph.D. and founder of Renaissance Capital

USG Corp (USG) Trimming Staff Due to "Continued Adverse Market Conditions"

USG Corp (USG), the maker of wallboard panels and other building materials, made an announcement after hours today that,

"as a result of continued adverse market conditions, the Registrant has initiated a program to further reduce its overhead and other costs. The program includes a salaried workforce reduction and other cost reductions that are targeted to reduce costs by an additional $22 million to $28 million annually, before charges for termination benefits."

As I've mentioned, the company is not profitable enough to service its debt.

USG Corp (USG): The Serial Restructurer

USG Corp (USG) has an amusing page in its investor relations area called "Restructuring and Rights Offering History."

Credit Bubble Stocks is 5/5: USG Corp (USG) Earnings Weren't Good Either!

With today's disappointing USG Corp (USG) earnings, Credit Bubble Stocks has gone 5/5 on this earnings season.

For third quarter 2010, USG reported net sales of $758 million, down 8% from the year ago quarter. 

“Our third quarter results reflect continued weak market conditions and extraordinarily low shipping volumes,” said William C. Foote, Chairman and CEO. 

USG's third quarter EBITDDAR for the third quarter and first nine months of 2010 was $51 million and $51 million, respectively. The company is not nearly profitable enough to cover its interest expense, which was $45 million and $134 million for the third quarter and first nine months of 2010, respectively. Total debt amounted to $1.959 billion as of Sept. 30, 2010

I think the difference between me and the bulls is they think we just finished a garden variety recession and are now embarking on another wave of expansion that will last for years. So, USG will start selling drywall like hotcakes when we are building 2 million new houses a year in 2012.

In contrast, one of my investing themes is that the 2009-2010 period of inventory restocking is going to be a high-water mark for economically sensitive businesses.

So Far

This has not been a good earnings season for companies in the Credit Bubble Stocks short portfolio: so far MGM, HOG, WGO and GBE have all disappointed.

Still on deck: USG Corp (USG) on 20-Oct-10.

Universal Forest Products, Inc. (UFPI) Reports Q3 Earnings

Things do not look good for companies in the construction supply chain.

Net earnings for the third quarter of 2010 were $2.6 million, or $0.13 per diluted share, compared to net earnings of $10.1 million, or $0.51 per diluted share, for the same period last year. 

While lumber prices stabilized during the third quarter of 2010, inventories were built earlier in the year—when lumber prices were up as much as 52 percent over the previous year—in preparation for a solid selling season, which didn’t materialize. At the end of June, the Company’s inventory consisted primarily of higher-cost lumber, which adversely affected profits in the third quarter.

OUTLOOK
The Company expects the current challenging conditions to prevail through 2010, limiting its ability to provide meaningful guidance for ranges of likely financial performance; therefore, the Company will not provide guidance for the foreseeable future. However, given the significant adverse impact of the lumber market mentioned earlier in this release, the Company does not expect to achieve growth in net earnings in 2010, although it is optimistic about its performance in 2011 and beyond as the economy improves, given its strong financial position, solid business model and diverse business opportunities.

USG Corp (USG) Subsidiary Being Sued Over Chinese Wallboard

USG has a contractor supply subsidiary called L&W Supply. It is being sued because during 2006 and 2007 it distributed some of the defective Chinese wallboard.

What's funny is this:

"We believe that the amount of Knauf Tianjin wallboard potentially sold by L&W Supply Corporation could completely furnish approximately 250-300 average-size houses; however, the actual number of homes likely is greater because some homes contain a mixture of different brands of wallboard and because some of the wallboard was used in condominiums, which typically are smaller than houses and use less wallboard. Our records contain the addresses of the homes and other construction sites to which L&W Supply delivered wallboard, but do not specifically identify the manufacturer of the wallboard delivered."

How telling - a product with so little differentiation, even the manufacturer can't tell the difference!

Industry capacity utilization at 50%, which is the key determinant of profit margin in a commodity industry.

What's the Significance of Berkshire Hathaway (BRK) and Warren Buffett's Investment in USG Corp (USG)?

Buffett has a big stake in USG Corp (USG), but I have some contrarian theories about Buffett:

• There is no information content in a Buffett holding as opposed to a purchase, because he basically won't sell no matter how bad things get. Examples: Moody's (discredited by their mortgage security ratings), Washington Post and Gannett (dying industry), USG Corp (down hugely since most of his purchases, why hold through a housing crash?), General Electric (turned itself into a bank making risky commercial loans)
• These deficits could stem from Buffett's mental models of America (and Goldman Sachs, and the newspaper industry) not recognizing the changes that have occurred since the 1950s.
• Has there ever been a case where Buffett recognized a problem in an industry and sold his holdings or went short?

I think USG breaks Buffett's own rules. Where is the "moat"? - the products are not really differentiated.

USG Corp (USG): Excess Wallboard Production Capacity

These paragraphs are also from the USG Corp (USG) Q1 2010 quarterly report.

Industry shipments of gypsum wallboard in the United States (including imports) were an estimated 4.57 billion square feet in first quarter of 2010, down approximately 7% compared with 4.89 billion square feet in the first quarter of 2009. U.S. Gypsum shipped 1.15 billion square feet of SHEETROCK® brand gypsum wallboard in the first quarter of 2010, a 12% decrease from 1.31 billion square feet in the first quarter of 2009. The percentage decline of U.S. Gypsum’s wallboard shipments in the first quarter of 2010 compared with the first quarter of 2009 exceeded the decline for the industry primarily due to our continuing efforts to improve profitability. U.S. Gypsum’s share of the gypsum wallboard market in the United States was approximately 26% in the first quarter of 2010, unchanged from the fourth quarter of 2009 and down from approximately 28% in the first quarter of 2009.

Currently, there is significant excess wallboard production capacity industry-wide in the United States. Industry capacity in the United States was approximately 34.4 billion square feet as of January 1, 2010. We estimate that the industry capacity utilization rate was approximately 52% during the first quarter of 2010, unchanged from the fourth quarter of 2009 and down from approximately 53% during the first quarter of 2009. We project that the industry capacity utilization rate will remain at approximately the first quarter level for the balance of 2010. Despite our realization of some price improvement since the latter part of the first quarter, at such a low level of capacity utilization, we expect there to be continued pressure on gypsum wallboard selling prices and gross margins.

Here is more of my commentary on USG Corp (USG).

Historically, the housing and other construction markets that we serve have been deeply cyclical. Downturns in demand are typically steep and last several years, but they have typically been followed by periods of strong recovery. If the recovery from this cycle is similar to the recoveries from past cycles, we believe we will generate significant cash flows when our markets recover. 

Will this housing downturn be followed by a period of "strong recovery"? That would require clearing the glut of housing from the market.

What and Where are USG Corp's (USG) Markets?

Here are the breakdowns of USG Corp (USG) sales for Q1 2010:

• residential and nonresidential repair and remodel activity: 49% of net sales
• new nonresidential construction:  28% of net sales
• new residential construction:  21% of net sales
• other activities:  2% of net sales.

For the first quarter of 2010, approximately 77% of our net sales were attributable to the United States, Canada accounted for approximately 12% of our net sales and other foreign countries accounted for the remaining 11%.

Looking at USG Corp (USG)

USG Corp (USG) manufactures gypsum products: wallboard ("drywall"), joint compounds, and so forth. A wallboard panel consists of an inner core made of gypsum (calcium sulfate) plus various binders and additives, wrapped in paper.

Who else makes this stuff? Georgia Pacific, National Gypsum, Temple-Inland, CertainTeed (subsidiary of Saint-Gobain SA), PABCO Gypsum, Lafarge, and American Gypsum (once a subsidiary of Centex, now owned by Eagle Materials).

Also, there is imported Chinese wallboard. Is there anything too heavy and low-value to be imported from China? I guess not.

Anyway, it is sort of a crowded industry, selling a commodity product to customers that are desperate (homebuilders and other construction), and who themselves face weak demand.

For almost two decades, the United States has build far more houses than the levels of household formation would suggest are needed. [If you are a Credit Bubble Stocks reader, I will assume that I don't need to belabor the bearish housing argument.]

I think this is relevant not only to homebuilding but also building products. Think of the wallboard manufacturers. Over two decades they have expanded capacity, adapting to a market that was building hundreds of thousands of extra houses (and other types of unneeded buildings), every year.

USG announced second quarter earnings today and I still like my USG short.

Their trailing 12 months EBITDDAR is only $47 million, versus the enterprise value of $2.8 billion. Interest expense for same period was $175 million.

I question whether USG cash flow can support its $1.95 billion in long term debt (witness the interest coverage shortfall). I don't see how the market can ascribe any serious value to the equity.

Is the market expecting a big homebuilding boom? I don't get it. Buffett owns a big slug of USG but he is notorious for holding on to positions for too long.

One of my investing themes is that the current TTM is going to be a high-water mark for economically sensitive businesses, assuming a double dip where things start getting worse again.