As housing recovers, USG mounts a rebound


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By: Marika Bastrmajian


After plunging more than 90 percent when the housing bubble burst, shares of U. S. Gypsum Corp. have been making a slow and steady climb back up as the real estate market recovers.  USG’s historically volatile stock still has plenty of upside potential, experts say– the only question is when the upturn goes into high gear.

As one of the biggest producers and distributors of gypsum wallboard and other building materials, the Chicago-based company fortunes are tied closely to housing sector.   When times are good in the building industry, wallboard prices jump and USG generates lush profits.   But when the building cycle turns down, profits disappear and investors bail out of USG shares.

In April 2006, during the peak of the housing market, USG shares topped out at a few pennies below $107.  Then came the housing crash, ad USG shares tumbled more than $100 to bottom out in early 2009 at $5.77.  These days the company’s shares, while nowhere near their heyday level, have begun a modest yet steady move back up.  In mid-day New York Stock Exchange trading Thursday, USG shares were trading at$27.07, a more than fourfold increase from their post-crash low

As housing has staged a grudging recovery, USG has returned to profitability for the first time since 2008, a year in which it reported a loss of $463 million.  In 2013 the company eked out net income of $47 million, and officials expect 2014 earnings to come in at just under $223 million;  in 2015, forecasts call for the company to  ring up earnings of around $315 million in 2015.

Chairman, president and CEO James Metcalf has been trying to reduce USG’s exposure to the housing market’s swings, through a strategy he has described as “diversifying earnings in select emerging markets and through adjacent products, and differentiating through innovation.”    As part of that effort, USG has focused its ceilings business on the commercial-building repair and remodel sector, a stronger market than the building of new commercial properties.

It’s paying off, Metcalf told analysts when USG recently turned in third-quarter results that, excluding one-time items, were up sharply from the year-ago quarter.   “The driver of that performance during the quarter was our focus on the higher-end high performance products which have a higher margin,” he said during a conference call.

Wall Street has taken note of the changes.  USG has made “great strides” in improving profitability by “increasingly targeting more stable commercial repair and remodel work,” Morningstar analyst James Krapfel said in a research note.

According to a research note from analysts at Sterne Agee, purchases of “building products and construction materials in the months of September, October, and November have offered the highest annualized returns versus the market.”

Despite stronger sales, the company suffered a net loss of $12 million, or 9 cents per diluted share, compared with a profit of $57 million, or 38 cents a share, in the year-ago quarter.

The adjusted numbers told a much different story.

“This year’s adjusted earnings excludes both a $30 million charge associated with the impairment of several of our idled plant assets and the $48 million charge associated with the lawsuit settlement,” noted Matthew Hilzinger, executive vice president and chief financial officer, in a conference call.

USG, along with several other makers of drywall for residential and commercial construction, was being sued for allegedly conspiring to fix prices for gypsum board products.  In an effort to cut further litigation costs, the company settled the lawsuit out of court last week.

“It is very disappointing to settle a lawsuit when you have strongly believed that you’ve done nothing wrong,” Metcalf said. “However, we have to be realistic about the cost of defending this lawsuit for several more years and the potential risk that it may create for USG.”

Despite its legal troubles, USG has a relatively high P/E ratio of 30.99, much higher than the median ratio of 22.31, and it comes in as the third highest in the industry according to Bloomberg. This may suggest that investors and analysts have high growth expectations for the company.

“What we heard in our meetings and our conversations confirmed our belief that the wallboard recovery is intact and USG remains a great way for investors to play it,” said Todd Vencil, analyst at Sterne Agee, in a research note issued after USG released its latest earnings.

Some analysts believe the company will be seeing improved margins due to its strong ties to residential and commercial construction starts.

Others believe that without a strong commercial construction recovery, the company will continue to face challenges in bolstering its profits further.