Friday, February 17, 2006

USG(USG) Analysis

USG Corporation is in the building materials business. The company had to file for bankruptcy because of asbestos litigation and is currently emerging from bankruptcy. The company operates in three segments: North American Gypsum, Worldwide Ceilings, and Building Products Distribution. North American Gypsum segment manufactures and markets gypsum wallboards, cement boards, and fiber panels. North American Gypsum segment is the one that has exposure to asbestos litigation. Its products are used for various building applications, such as interior walls, ceilings, and floors in residential, commercial, and institutional construction, as well as for industrial applications. The company's Sheetrock(T) line of products are particularly popular. Worldwide Ceilings segment manufactures and markets interior systems products worldwide. Its interior ceilings products, such as ceiling grid and acoustical ceiling tile are primarily used in commercial applications in United States, Canada, Mexico, Europe, Latin America, and the Asia-Pacific region. Building Products Distribution segment distributes gypsum wallboard, drywall metal, ceilings products, joint compound, and other building products in the United States. The company distributes its products through building materials dealers, home improvement centers and other retailers. It also manufactures mineral fiber products and metal specialty systems.

In this section, we will analyze USG's balance sheets and see the risk of asbestos litigation and balance it against the cash flow and growth of the company.

The Corporation's operations are organized into three operating segments: North American Gypsum, Worldwide Ceilings and Building Products Distribution. Net sales for the respective segments accounted for approximately 54%, 12% and 34% of 2005 consolidated net sales respectively. North American Gypsum has 30% of U.S market share.

USG has to pay 3.95 billion in the worst case scenario for asbestos litigation related charges. The sales in 2005 increased by 14% compared to 2004. The operating margins also increased in 2005 50 21.4% compared to 2004 where the margins were at 18.6%. The company had 1.577 billion of cash or equivalents at the end of 2005. The company recorded a net loss of $1.436 billion, or $32.92 per share, was recorded in 2005. This loss included the after-tax provision of $1.935 billion, or $44.36 per share, for asbestos claims and an after-tax charge of $11 million, or $0.26 per share, for the cumulative effect of an accounting change related to the adoption of FIN 47. Excluding these charges, 2005 net earnings were $510 million, or $11.70 per share. The expectation for 2006 is about 14% increase in earnings to $13.35/share.

Cash flow from operations increased by 18% year over year to 506 million from 428 million. The sales in the North American Gypsum segment increased by 17%. The sales in the world wide ceilings department increased by 2.7%. Sales in the building products group increased by 18%.

The total assets of the company was 6.142 billion with 5.34 billion set aside for asbestos litigation settlements. Taking into account cash flow from operations of 506 million per year growing at 8% for the next ten years with a discount rate of 6% per year, provides net cash flow of approximately 6 billion dollars in the next ten years. Given this cash flow, if no further money is set aside for asbestos based litigation and if there is no further stock dilution, we get a per share price of 139 dollars. The growth rate could be higher in the immediate future and further sums of money may need to be allocated for asbestos litigation. There could be further dilution in the company's stock once it emerges from bankruptcy reducing the attractiveness of the stock. I believe a growth rate of 8% is is reasonable for building products given the population growth in the U.S and the consequent demand for housing.

1 comment:

wabuffo said...

I'm confused with your valuation. Why are you using operating cash flow and not free cash flow (ie after some normalized level of capital expenditures)?

Also why do you discount cash flows until year ten? What is your estimate of terminal value after year ten?

Finally, how are you factoring in the significant cash that has built up on the balance sheet -- almost $1.6 Billion? What about the value of the rights? And the non-asbestos Chapter 11 liabilities?