USG

A few weeks ago, Jim Cramer spoke confidently about a bottom in the housing sector on his show Mad Money. Noting the rally in builders’ stocks, he recommended the construction materials company USG as a “stealth play” to get into the move at a decent price. USG’s stock took a hit in July from a high of 20 down to 15 after 2nd quarter earnings didn’t meet analyst expectations.

Here is the video from Mad Money

Is Cramer right?

According to Forbes,  “in trading on Thursday, general contractors & builders shares were relative leaders, up on the day by about 3.1%. Leading the group were shares of Brookfield Residential Propertie (BRP), up about 5.5% and shares of Pultegroup (PHM) up about 5.3% on the day.Also showing relative strength are construction materials & machinery shares, up on the day by about 2.3% as a group, led by USG (USG), trading up by about 3.5% and Cemex (CX), trading up by about 3.5% on Thursday.”

It seems like he might be onto something, so I decided to take a look at the fundamentals.

USG

Looking at the financials, we see a company hit hard by the recession and slow-down in the housing market. At its peak, USG was making over $7/share, but has been in negative territory for over four years now. The company has been improving its deficits since 2009, but can we hope to see this trend continue enough to justify taking a position in the stock?

This is were things get complicated. I am sure there are several savvy ways to value a company with negative earnings that I haven’t learned yet, so I will have to rely on the basic skills that I do have. First, with negative earnings, there is no multiple to use for comparisons. If we assume USG was to eventually turn a profit and sell at a multiple equal to the current average of the S&P 500 (around 16), how much would the company need to earn per share to justify the current stock price? With a price near $20, USG would have to earn $1.25 to justify its current price, assuming the S&P 500 average multiple. With annual earnings from 2011 at -3.76, given the growth rate of this company, a positive flow of 1.25/share seems too far on the horizon to feel comfortable with the current stock price.

To justify buying this stock today, I would want to see solid evidence that we really are at the real estate bottom and have compelling evidence that USG is going to grow faster and greater than ever before. This sounds like too risky a proposition to consider.

It will be interesting to watch this stock and see what it does over the next several years.

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