With its increased position in USG Corporation, (USG) as reported in its most recent 13F filing, Berkshire Hathaway is showing some serious confidence in the recovering housing market.
USG, also known as United States Gypsum Corporation, is primarily a gypsum board manufacturer. Like lumber, gypsum wallboard and sheathing may not be a large part of the cost of constructing a building, but it's used in almost every housing unit -- and in most commercial construction.
Buying at the bottom
Housing is a primary driver and leading indicator of growth and consumer confidence. The housing sector got us into the mega recession. Housing growth indicates we are progressing out of it. The consensus is that the recession ended in 2009. Perhaps we'll find that the housing construction recession ended in 2011.
Buying USG, which accounts for 25% of the gypsum board business in the United States, could be seen as a pure play on housing.
Housing numbers don't lie
Warren Buffett's purchase of USG is not the only clue that housing may be doing better. Building permits for single family and multi-family constructions were up a solid 20% across the country for 2013, according to the National Association of Home Builders.
It's not quite business as usual for the construction industry yet. The top five homebuilders sold only one-third the number of units in 2013 that they sold annually at the peak of the housing bubble in 2005.
However, 2012 was significantly better than 2011. And the largest homebuilder, D.R. Horton (DHI -0.55%), closed 28% more homes in 2013 than they did in 2012, at closing prices that were on average 12% higher.
Has the housing industry's recovery helped USG?
The numbers from USG don't lie, either. Shipments are improving. Their gypsum wallboard shipment numbers bottomed in 2011. In the next two years, however, volume increased by 15% and 11%, respectively.
USG reported a fourth quarter 2013 sales increase of 12% and adjusted net income of $22 million -- a big turnaround, compared to the fourth quarter 2012 adjusted net loss of $52 million.
Even more good news: On February 6, 2014, USG reported that fiscal year 2013 was their first full year of profitability since 2007.
As of the fourth quarter of 2013, Berkshire Hathaway now holds $990 million in a $3.8 billion market cap company -- a 25% stake. They own almost 35 million shares of USG stock, and USG is one of their top 16 holdings (that are not subsidiaries).
Berkshire's reported purchase price per share was $28.38. If the Berkshire Hathaway portfolio manager thought USG was a good price at this level, any dips to within 5% of this price could be considered by investors to be a excellent opportunity to invest alongside the legend.