The Destroyer of Finance

 What a sultry, sweaty day… and on all such sultry days it is fitting that S all happens in the world.

 Some dude named Dell and his company had a good day after reporting a very nice improvement in sales.

 Oil has retreated somewhat to $127, but don’t expect gas prices to track perfectly.  Part of the reason is the refiners.  The profit margins for petrol refiners have gotten squeezed in recent weeks as they have been unable to fully pass along the increased cost of oil (this is me saying that if they had been able to, gas would be a good 10 cents a gallon more expensive).  The refiners will look to recover some of that margin as oil retreats in price.

 I know few out there are going to shed a tear for the refiners, but thems the breaks.  You could refine your own 87 octane if you wanted.  What… you can’t?  Guess you’re stuck then.  And all it would take would be a multi million dollar start up investment plus loads of money in federal compliance regulations.

 I was in the elevator lobby on my floor staring at the fairly large flatscreen we have hanging on the wall yesterday.  It was after market close and there were these people on CNBC with snazy ties and shiny shirts and perfectly groomed and producted up hair and stupid ass goatees just spouting stuff, and I’ve just got to say:

 D

 O

 U

 C

 H

 E

 .

 These same people were pondering which restaurants had hedged their food costs and which restaurants had decided to rely on the “free market”.  Sorry guys, by the ability to manage risk (hedges) is sort of a key element of “free market.”

 Also, I let my CFO onto the floor today.  My backstabbing fatass ex-boss would probably be green to see me greet a banking CFO by first name.

 

Company: USG Corp (NYSE: USG)

 Industry: General Building Materials

 2007 Profit: $76M

 Current Market Capitalization: ~ $3.37B

 Current Price/Earnings: ehhh… NA?

 Industry Avg. P/E: ~21.9

 Ok, so USG makes building products.  Home building products.  HOMEbuilding products.  Mostly they are gypsum based.  Now I don’t understand how you base your buisness around a wandering tribe of peoples from eastern europe, and clearly neither does USG.

 Where the housing market goes, so goes USG.  With the major part of USG’s business coming from sales of wallboard and related products in the US [84%, fyi] (although they do business in Mexco, Canada, and China as well) USG is tied to both the commercial demand from homebuilders (most important) and the retail demand from the home improving consumer.

 USG has recently stated that they believe the decline in homebuilding activity has leveled off… at about 50% of previous levels.  As for the retail consumer… well, have you seen retail sales numbers?  Things aren’t really expected to get any better anytime soon, either.  Analysts’ predictions for future earnings…, I mean losses, keep getting worse and some of this might be the three consecutive quarters with results at least 30% worse than expected.  From a profit of $1.06 a share in 2007 Wall Street now expects a loss of $1.30 a share in 2008… on a larger number of shares.

 On the other hand, USG is pretty much the world’s leader in production of gypsum wallboard.  They are in the middle of an effort to close old inefficient plants and open new plants in an attempt to lower costs and shed staff.  There will be costs associated with this plan (paying off all the people they let go, for one), and if the US housing sector stays in the doldrums it won’t really make so much of a difference.  While the cost that USG must pay for its raw materials has increased, the sagging demand from the housing sector has left USG getting only 64% as much per sq ft as they did a year ago.  Hell, they’re only getting 94.7% as much per sq ft as they did the previous quarter (nevermind last year).  USG’s gross margin on their products has fallen from 16.8% a year ago to only 3.5% this year.  USG does note that they successfully implemented a price increase near the end of the first quarter.

 On the positive side of things, USG has managed to hold onto more of its demand than the wallboard industry as a whole.  While the demand for wallboard fell 13% from a year ago, USG’s sales (by sq ft) fell only 3%

 The key will be holding onto their demand and making it through their reorganization effort.  Many of the the smaller wallboard producers will not survive the this shakeout, and with the attention given to cost efficiency now USG would definitely be in pretty good shape on the other side.  There is also, of course, the possibility of increased wallboard demand in emerging markets (in general) but China in particular, especially in the aftermath of the earthquake (they need to repair those lake dams after all).

 So am I going to keep rambling?  Always.

 Risk level: moderately high

 Current price: $34.05

 So the question is: Is there a reasonable probability that USG worth at least 30% more ($44.25)?

 I really don’t see it.  In fact, I’m not so sure that it’s worth $34.  Mid $20’s and I get interested OR if the second quarter’s results indicate that the restructuring is going well I’d re-examine.  Problem is that USG would have to have a profit level equivalent to 2006 levels (the height of the housing boom) to justify $44, and that’s assuming no further share dilution.  That’s pretty hopeful for any time in the next few years.

 Everyone knows that I love wallboard,

 Manny Ramirez