Here's 1 Reason USG Looks Weak

Margins matter. The more USG (NYSE: USG  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong USG's competitive position could be.

Here's the current margin snapshot for USG over the trailing 12 months: Gross margin is 6.3%, while operating margin is -4.2% and net margin is -13.8%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where USG has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter. You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for USG over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 23.8% and averaged 9.9%. Operating margin peaked at 16.6% and averaged 1.2%. Net margin peaked at 5.1% and averaged -8.3%.
  • TTM gross margin is 6.3%, 360 basis points worse than the five-year average. TTM operating margin is -4.2%, 540 basis points worse than the five-year average. TTM net margin is -13.8%, 550 basis points worse than the five-year average.

With recent TTM operating margins below historical averages, USG has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Got an opinion on the margins at USG? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On January 09, 2012, at 11:08 AM, Topher60657 wrote:

    USG's core product, Sheetrock, is a commodity. When margins were at their highest, there was not enough industry supply to fuel the housing market demand - thus the price rose. During this time USG and all the other drywall manufacturers were making tons of cash. Unfortunately, all of these manufacturers bought into the idea that the housing bubble was sustainable and used their new cash to buy brand new high capacity board plants. This added billions of feet of wallboard capacity to the industry. Starting in the 3rd quarter of 2007 the demand for wallboard started to fall off a cliff. This left all the wallboard manufacturers with capacity to service bubble level demand in a market that had nearly zero demand. All these plants are built to last a good 30 years. The only way that margins will increase is if the industry gets to a point where demand increases driving up the price. If you can predict when the housing market will pick up, that's when USG's margins will increase but they will never get as high as their peak during the housing boom unless they come up with some new business or capacity is removed from the industry.

  • Report this Comment On January 10, 2012, at 9:19 AM, mrmantelli wrote:

    Lets not forget how USG is up over 90% since 10/4/11, while the DJIA and S&P are both up 16%.

    I cannot compare the 5-year chart to the 2 year chart. It looks like the last 2 years of revenue are somewhat flat after 2009 ended. GM, OM and NM look the same in 2010 and 2011. It also looks like Gross Margins are improving QoQ in 2011.

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