If wallboard manufacturer USG's (NYSE: USG) third-quarter conference call were a movie, it'd be called When Bad Things Happen to Good Companies. The results were terrible, but I don't blame the company. I'm too busy trying to figure out a good spot to grab some USG shares.
For the quarter, sales fell 10% to $1.3 billion, and net income plummeted 95% from $153 million last year to $7 million this year. USG's struggles were no surprise. New housing starts, which fell to 14-year lows, represent 40% of wallboard demand. Meanwhile, homebuilders like Toll Brothers (NYSE: TOL), Pulte Homes (NYSE: PHM), and D.R. Horton (NYSE: DHI) have gotten creamed.
Residential repair and remodeling, which accounts for 25% of wallboard demand, has started to weaken, as evidenced by Lowe's (NYSE: LOW) and Inside Value recommendation Home Depot's (NYSE: HD) reduced sales estimates.
Only commercial construction, which accounts for about a third of wallboard sales, continues to perform well. In light of the terrible housing market, wallboard pricing sank from $188 per thousand square feet a year ago to $122 currently.
In times like these, the best thing for USG to do is stay disciplined and position itself better for the future. USG believes it captured market share and outperformed many of its peers in the last quarter. Based on industry data, it believes its 80% capacity utilization rate outperformed the estimated 75% industry capacity utilization rate.
In addition, USG continues to get rid of old, higher-cost capacity and build state-of-the-art new facilities. This makes a big difference. The capacity utilization rate at old facilities runs at around 49%, versus 95% at newer facilities, because newer capacity can often produce wallboard at half the price of older capacity.
At this point, USG will, for the most part, have to be patient and wait for the housing market to rebound. Meanwhile, it's doing the right things in terms of repositioning and cutting operating expenses. Although it might take several years for the housing market to recover, USG shares should rebound once that happens.
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