If ever there was a company that looks like the perfect fit for Berkshire Hathaway it would have to be USG–the leading manufacturer of gypsum wallboard. After all, Berkshire already owns insulation manufacturer Johns Manville, Acme Brick, and presently has a 41.91% stake in USG.
USG and Berkshire
Berkshire has a minority stake in USG that goes back to 2000, when it purchased 6.5 million shares, and later increased its holding during the nadir of the Great Recession.
In 2008, with the housing market imploding and lending all but frozen, Berkshire came to USG’s rescue with $300 million of convertible notes that paid Berkshire 10-percent interest. At the time, the boost in confidence that USG received from Warren Buffett’s financing helped the company avoid bankruptcy. Boost investor confidence it certainly did, and the day of the transaction USG’s stock soared 22-percent to $6.89 a share.
Five years later, in December 2013, Berkshire exchanged $243.8 million of the convertible notes for common stock, and with additional purchases, its stake in USG now makes it the company’s single largest shareholder.
USG is a solid earner with a Price/Book of 2.16, a P/E of only 3.73, and EPS of $6.72. The stock currently pays no dividend and USG has stated they have no plans to do so. USG does carry a substantial amount of debt, which as of December 31, 2014, totaled $2.209 billion.
Wallboard Numbers Are Up
So, is now the time for Berkshire to fully bring USG into the Berkshire family of companies? Demand for gypsum wallboard is up. According to the Gypsum Association, a not-for-profit trade association, roughly 21.8 billion square feet of gypsum board were shipped in 2014. This was an increase of approximately 4% from 20.9 billion square feet in 2013. USG’s share of the gypsum board market in the U.S was approximately 26% in 2014, basically unchanged from 2013.
The Chinese Drywall Scandal
As an American manufacturer, USG has been a beneficiary of the Chinese drywall scandal that came to a head in 2009. Imported wallboard from China that had high sulfur content brought reports of fumes that created upper respiratory problems, and the market for wallboard from China was hit hard. Thousands of homes in Florida and other states needed to have their wallboard ripped out and replaced.
In 1902, 30 independent gypsum rock and plaster manufacturing companies merged to form the United States Gypsum Company. Over more than a century, USG has been issued 1,100 patents for its products. In addition to wallboard, the company is a leading manufacturer of acoustical panel and specialty ceiling systems. The company has 34 manufacturing plants in the U.S., and has roughly 9,000 employees in more than 30 countries.
USG’s a true market leader with a 26% market share of the U.S. gypsum wallboard market. It is followed by National Gypsum at 21%, and Georgia-Pacific at 16%. It has an even more commanding 50% share of the joint compounds market.
Time to Pull the Trigger?
The Chicago-based company has seen its ups and downs, including three bankruptcies. The last bankruptcy was in July 25, 2001 under Chapter 11 in order to deal with a mountain of asbestos litigation costs related to asbestos containing joint compounds. The establishment of the The United States Gypsum Asbestos Personal Injury Settlement Trust put the company’s asbestos woes in the rear-view mirror, and its stock price reflects it.
Also on the upside is the extensive cost cutting the company has done over the past decade. USG has closed high-cost manufacturing plants, and used salaried workforce reductions and other cost reductions to trim an additional $22 million to $28 million annually. In all, its cost reductions have totaled $500 million.
With a market cap of just over $3.66 billion ($1.46 billion of which is already owned by Berkshire), USG is a great fit for Berkshire if it wants to gobble up the whole thing. USG would fit nicely into the Marmon Group of companies, which include a host of companies that supply the construction industry.
So, will Berkshire pull the trigger? A two billion dollar deal is not a big one for Berkshire these days, and with new housing starts hitting a nine-year high, and slowly heading back towards the historical levels of 1.5 million starts a year, USG looks like a solid company worth adding to the Berkshire portfolio.
© 2016 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.