The Slowest Way to Build a Small Fortune

The last time I checked in with building materials manufacturer USG (NYSE: USG  ) back in January, I proposed that the company was in a battle for its very survival and asked readers to consider whether USG had the eye of the tiger.

USG shares have promptly tripled since early March, suggesting that investors' concern for the company's survival prospects have ebbed. Let's assume that Warren Buffett's willingness to double Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) stake in USG to 34.6% speaks volumes about the company's long-term viability ... as indeed it may. If USG is destined to emerge one day from the ashes of North America's housing and construction materials sectors, the latest earnings are a baby step in the right direction.

USG reported its sixth consecutive quarterly loss this week, with a 26% decline in sales. The loss was only about half the hemorrhage analysts had feared, helping to spark a quick 35% rally over the past two days. Evidence emerged that cost-cutting measures are having the desired effect, as the gross margin improved from 3.9% to 5.6%. The combined impact of a 20% workforce reduction, plant closings, and production cuts has yielded a far leaner company more suited to the horrendous market conditions. Toss in the $400 million infusion earlier in the year from the same convertible debt offering that doubled Berkshire's stake, and we find USG in a substantially improved liquidity position, with $223 million in cash.

Notwithstanding the greater operational efficiency and liquidity, the most crucial ingredient for sustained improvement remains elusive. To get USG back on its feet, of course, we need healing within the underlying construction industries. Fellow Fool contributor David Smith saw some relative thawing within the housing sector fundamentals between his last check in November 2008 and his update this week, but also reminds readers that sustained weakness looms large on the horizon. The Pulte Homes (NYSE: PHM  ) merger with Centex (NYSE: CTX  ) has created some buzz, but with foreclosures still rising and home values dropping, I expect that buzz to fizzle. Canadian National Railway (NYSE: CNI  ) confirms huge declines in volumes of forest products like those produced by Weyerhaeuser (NYSE: WY  ) .

I believe the declarations of looming recovery are drastically premature, and consider homebuilding and construction among the least attractive sectors out there. Sure, a true recovery for USG shares could eventually yield a tidy sum, but even this patient Fool would prefer a more direct route to profit.

Further Foolishness:

More than 1,800 members of Motley Fool CAPS, including 516 All-Stars, expect three-star pick USG to outperform the S&P 500. Whether you think USG has the "eye of the tiger" or one foot in the grave, I know Fools would like to know your thoughts on this and other companies.

Fool contributor Christopher Barker wonders whether gypsum wallboard was invented by gypsies. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns no shares in the companies mentioned. Berkshire Hathaway and Canadian National Railway are Motley Fool Stock Advisor recommendations. Berkshire Hathaway and USG are Motley Fool Inside Value recommendations. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days.


Read/Post Comments (3) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 23, 2009, at 4:52 PM, VIIIandXX wrote:

    Dude,

    They don't ring a bell, I've made a small fortune from the shares I was buying for 5-6 bucks with 1/2 my net worth. After Buffett doubled his stake it was the biggest no-brainer in my 15 year career.

    Buffett is wrong on 1 out of 100 investments over a 50 year period, I'll take the odds that this is not one of them.

    Nice article, just don't agree.

    Good luck

  • Report this Comment On April 23, 2009, at 5:03 PM, XMFSinchiruna wrote:

    Congrats on the trade, assuming that's what it was. As a long-term buy-and-hold investor, though, I remain focused upon sectors with the least impaired fundamental underpinnings, and I consider this sector about as far from unimpaired as one will find.

    If you're holding for the long haul, I wonder, how long to you intend to wait for material recovery of the underlying business?

    Good luck to you too. :) Fool on!

  • Report this Comment On April 27, 2009, at 10:27 AM, swantly wrote:

    "but even this patient Fool would prefer a more direct route to profit."

    I bought USG at $7, for a profit of ~90% in 2 months.

    What more direct route to profit do you suggest?

    Can you recommend a stock that will give me better returns?

    I feel like a fool that I ever subscribed to your services. At times I've disagreed with the negative sentiment that others seem to express, however, as time goes on, I tend to agree with the masses.

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