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.