(By Mani) USG Corp.
) is expected to report strong earnings growth, driven by favorable wallboard pricing trends in tandem with market share gains in the big box category and disciplined cost control.
USG makes building materials, including gypsum wallboard, ceiling grid, and ceiling tile. The company is the largest or second-largest player in each of its primary product categories in which it operates. USG is the largest manufacturer of gypsum wallboard in the U.S., the largest manufacturer of ceiling grid in the world, and the second-largest manufacturer of ceiling tile in the world.
For the first quarter, USG reported a narrower net loss of $27 million or 26 cents a share, compared with $105 million or $1.01 per share loss a year earlier. Net sales for the first quarter rose 13 percent to $812 million. Analysts polled by Thomson Reuters expected loss per share of 42 cents a share on revenue of $807.22 million for the quarter.
The wallboard industry's decision to adopt a new pricing strategy at the start of 2012 by substituting job quotes with a single price for the entire year has resulted in a sharp rise in wallboard prices.
"Our conversations with distributors across the country indicate that current wallboard prices are now in the range of $145/MSF (+29% y/y) vs. $111/MSF last year. As a result, we expect that operating margins will expand as legacy contracts are replaced by distributors restocking inventory at higher prices," RBC Capital Markets analyst Robert Wetenhall said in a client note.
USG is maintaining volumes in a soft demand environment through the introduction of new products in the big box channel which are taking market share. This business is expected to benefit materially from both increased pricing and favorable sales leverage which is expected will drive operating margin performance 1,120 basis points higher to 7.1 percent in fiscal 2012.
Favorable pricing trends and increased market share should be sufficient to offset unfavorable volume trends based on recent weakness in the Architectural Billings Index (ABI) and other leading indicators which point to soft demand.
USG has streamlined the company's operations and achieved $478 million in cost reductions over the past five years which should allow the company to achieve greater levels of profitability at comparatively lower volumes.
USG has total debt of about $2.3 billion and net debt of about $1.7 billion which implies net leverage of 14.0 times based on first quarter last twelve months EBITDA of $121 million. The company's EBITDA is projected to grow substantially over the next two years and these offset concerns from high debt load.
"We do not believe USG's leveraged balance sheet is a concern due to the company's ability to materially grow EBITDA in response to favorable wallboard pricing trends," Wetenhall added.
In addition, USG stock's low correlation with the market and negligible exposure to Europe provides investors with a clear way to make a stock bet in a highly correlated environment.
USG shares have rallied 88 percent year-to-date versus the S&P 500's 4 percent gain, and its share price is approaching levels last reached in April 2010. Accordingly, many investors may feel they are too late to the party.
"Although we prefer an entry level closer to $17, we still think that USG can generate a return of 22% during the next 24 months in response to favorable wallboard pricing trends and market share gains that are expected to more than offset the impact of soft demand," Wetenhall said.