This company has engineered a turnaround since the depths of the housing bust, returning to profitability. Buy on weakness.
USG Corp. (USG)
from Cabot Top Ten Trader
You’re not going to find a company that’s more levered to a housing recovery than USG Corp. (USG). It’s the largest distributor of wallboard in the U.S. and the largest manufacturer of gypsum products in North America. During the housing boom, that was a very good thing, with the company earning north of $8.50 per share in 2005 and 2006.
But the bust hit hard, and management didn’t react fast enough; USG lost money for five straight years, hindered by a large debt load. The beginning stages of the housing recovery didn’t help much, but now that housing starts have remained elevated, prices for the firm’s products have picked up, as have volumes. Combined with belated cost cuts, the odds favor a booming bottom line ahead.
In the fourth quarter, USG earned its fourth straight quarterly profit, and notched its third straight quarter of double-digit sales growth, thanks mainly to its highest level of wallboard shipments since late 2008. With commercial demand expected to join the party this year, analysts see earnings of $1.80 per share this year (up 169%) and $2.80 the year after.
Of course, being so highly leveraged and with a so-so history, any hiccup in the economic
or housing outlook will take its toll on USG. But right now, the wind is definitely at the firm’s back. USG has a pattern similar to most housing stocks. It bottomed in 2011 (below 6), rallied strongly into the start of 2013 (to 31), and then built a monstrous, year-long base. Now, though, the buyers are flexing their muscle. Thanks to a much better-than-expected quarterly report, USG has popped to new price highs, and volume last week was the heaviest in nine months. We think you can take a small position on any weakness, with a stop near 30.
Suggested buy limit: 31-33
Suggested Loss Limit: 29.5-30
Note: Cabot’s buy range is valid for two weeks.
Michael Cintolo, Cabot Top Ten Trader, www.cabot.net, 978-745-5532, February 10, 2014