Last year I wrote a very positive Chasing Value article suggesting that USG Corp (NYSE: USG) looked like a value proposition when it was trading around $52 a share. We bought it and to say we were way too early would be very very kind because it dropped with the market in the summer and has only recovered slightly.
Even worse, Alan Greenspan and Ben Bernanke are finally talking about a recession and USG is still laying off more workers, attempting to balance labor and product demand in a weak housing market and soft economy.
Berkshire Hathaway (NYSE: BRK.A) is still the largest shareholder, owning over 17% of the outstanding shares. Most of what I liked last year holds true but the depth of the economic downturn shows little signs of improvement. Housing and most related construction service industries are just trying to survive. They have all cut back production.
There is little consensus when the economy might start to show significant signs of improvement, but there are few people who think it will be soon, and I have spoken with many in the business community who think it will be 18 months at least. However, timing the market is always difficult so I believe that the best you can do is try and buy solid companies on the cheap. The difficulties that USG is weathering now will turn into strengths in the future as it streamlines the enterprise, reduces debt, and plans for the future.
Earlier in the week I posted about finding the market bottom using that age-old handheld calculator, a white paper napkin. So, unfortunately it looks like I may be right again. Not exactly something I was hoping for, but if it has to be, it has to be. I wonder if my old napkin can outperform Wall Street super computers?
Is this an auction to the bottom? Are investors bidding things down instead of up? Looks like it from all the negative sentiment. Consumer sentiment is down, and short sellers are all excited, increasing their negative positions to new highs every day.
And here is the all-telling sign of capitulation: the ever-lying overly optimistic government is starting to admit how bad things are and throwing hundreds of billions of dollars at the problem. When does the turnaround come?
According to an ominous story on Bloomberg.com this morning, the recession is already here. It makes the argument that in many sectors of the economy, corporate profits were severely depressed in the third quarter.
In order to protect the bottom line, many companies have announced wholesale lay-offs in the tens of thousands. They are looking to every department to cut expenses and staff and often just eliminate entire departments. There is no doubt that this shake-out is happening because a day has not gone by in the past six months that we have not read about the falling dominoes of the economy.
The housing market, which was ripe with speculators and dreamers (of home ownership or huge profits) fueled by cheap financing which has disappeared, is now in full retreat. The depressed housing and credit markets were the first to show signs of weakness, followed by mortgage lenders who did not have to announce lay-offs, they just closed their doors. The home builders are not building, and the suppliers like Lowe's Co. (NYSE: LOW) and Home Depot (NYSE: HD) on the retail end and Caterpillar (NYSE: CAT) and USG Corp (NYSE: USG) on the wholesale end are feeling it.
Furniture Brands-(NYSE:FBN) markets residential furniture through Broyhill Furniture, Lane Furniture, Thomasville Furniture and HDM Furniture. FBN is recently up $3.30 to $13.44 after Samson Holding reported a 14.9% stake in FBN. Samson has indicated it may seek to acquire control of the company. FBN reported June 2007 quarterly total revenue of $535 million. FBN will host an investor day on 10/23 in New York City. FBN October option implied volatility of 54 is above its 26-week average of 35 according to Track Data, suggesting larger price risk.
USG-(NYSE: USG), a manufacturer and distributor of building materials, is recently up $.57 to $38.14 on renewed & unconfirmed takeover chatter. Unconfirmed chatter is circulating today that a consortium of four of the largest Chinese construction companies wants to acquire a 24% stake in USG. China Overseas Land is one of the names mentioned in the consortium. Warren Buffet is an owner of approximately 19% of USG. USG October 40 calls have traded 72 times on transaction volume of 2,103 contracts above its open interest of 2,013 contracts. USG October option implied volatility of 42 is above its 26-week average of 32 according to Track Data suggesting larger price risk. Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
This is the fourth update on the stock price status of the first seventeen Chasing Value companies. Closing prices are from September 14, 2007.
The first quarter produced amazing results but the second quarter was downright sad. No one will be surprised to see that anything touching constuction or finance took a bath. I own most of these stocks, so if you do too, I feel your pain. Anyone considering my commentary should "do their homework" too, as James Cramer says on his Mad Money TV show. These recommendations are from the first and second quarter 2007 and I have linked to the original stories.
Cemex sank with the continuous reports of the deteriorating housing market in the United States. In the meantime it continues to move forward with the integration of Rinker, the largest supplier of construction materials in Australia. This makes Cemex the largest in the world and sets the stage for continued growth in Southeast Asia. It also is continuing to focus on reducing debt.
Of all the stocks I have written about in the Chasing Value section, I feel that this one suffered the most from guilt by association. I believe it was fairly valued before and it is on sale now. This company, with it's PEG ratio at .83 and lowered, P/E, P/S, P/B (SEE: AOL Money & Finance) has a ROE over 22 and pays about a 2% dividend yield.
MOST NOTEWORTHY: McGraw-Hill (MHP), Stein Mart (SMRT), USG Corp (USG) and Seacoast Banking (SBCF) were today's noteworthy downgrades:
JP Morgan downgraded shares of McGraw-Hill (NYSE: MHP) to Neutral from Overweight based on expectations for a decline in credit market issuance activity.
Stein Mart (NASDAQ: SMRT) was cut to Sell from Neutral at Merrill, citing macroeconomic concerns and the impact on margins and comps.
Matrix cut USG (NYSE: USG) to Sell from Buy and removed them from the Focus List, Matrix cited the 55% cut in excess cash per share over the past year, which makes shares expensive on a performance-adjusted basis.
Stifel views Seacoast Banking (NASDAQ: SBCF) as overvalued, downgrading shares to Sell from Hold, given earnings growth headwinds from credit quality and net interest margin compression...
MOST NOTEWORTHY: DaimlerChrysler (DCX), Omniture (OMTR), Convergys (CVG), Expedia (EXPE) and Baidu.com (BIDU) were today's noteworthy upgrades:
WestLB upgraded shares of DaimlerChrysler (NYSE: DCX) to Buy from Add after the company raised the profit margin forecast for its Mercedes unit.
Omniture (NASDAQ: OMTR) was upgraded by Piper Jaffray to Market Perform from Underperform to reflect the company's strong revenue momentum and expanding margins.
Wedbush upgraded Convergys (NYSE: CVG) to Hold from Sell on valuation.
Citigroup raised shares of Expedia (NASDAQ: EXPE) and Baidu.com (NASDAQ: BIDU) to Buy from Hold on valuation...
OTHER UPGRADES:
Bear Stearns upgraded shares of Ryder System (NYSE: R) to Outperform from Underperform.
Lehman raised EnCana Corp (NYSE: ECA) to Equal Weight from Underweight.
USG Corp (NYSE: USG) was raised to Neutral from Underperform at Buckingham.
Morgan Keegan upgraded shares of Panera Bread (NASDAQ: PNRA) to Outperform from Market Perform.
On today's STOP TRADING! segment on CNBC, Jim Cramer addressed the homebuilders all being up based on the very unconfirmed rumors that Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) was taking a stake in homebuilder Hovnanian Enterprises (NYSE: HOV). Cramer said it would more likely be Pulte Homes (NYSE: PHM) because Hovnanian is more regional and he can go in bigger with Pulte. This shows that it is too hard to short in this market. Cramer said Buffett has always liked this group.Cramer also noted USG Corp. (NYSE:USG) as one of the core housing-related plays that Buffett owns.
What is interesting is that Buffett and Hovnanian would probably not make as much sense as him looking at either a component maker that sells to all homebuilders or as much as one of the larger housing stocks. It has too much exposure to Southern California and the entire hurricane band of Florida. If you don't believe it look at its mapping demo. Buffett is still wanting to make "The Whale of Deal" and Hovnanian has a mere $1.15 billion market cap. Back on May 7 we gave a list of potential US targets that could make sense in the "Whale" category for Buffett.
Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.
The Wall Street Journal (subscription required) highlighted the struggles of casual dining chain Applebee's International (NADSAQ: APPB), where even the company's founder said "[Applebee's] doesn't have anything that would make me want to come back".
OTHER PAPERS:
According to the U.K. Times, Vodafone Group (NYSE: VOD) is the favorite to win the European rights for Apple Inc's (NASDAQ: AAPL) iPhone, despite stiff competition from rivals Orange and T-Mobile.
From BusinessWeek's "Inside Wall Street" column:
There's talk that Warren Buffett may increase his 17% stake in USG Corporation (NYSE: USG) before the housing cycle turns.
Demand is surging for Kaydon Corporation's (NYSE: KDN) anti-friction bearings, which are used in robotics, aerospace, and other industries, including wind power equipment.
Could it happen? Could News Corporation (NYSE: NWS) pull its offer? They could, and the fear is absolutely there. That's why the stock has fallen. For one, the Bancroft family, which controls the majority of Dow Jones' shares, hasn't formally accepted Rupert Murdoch's $5B, $60 a share offer. And no one else has come forward with a competing bid. But it does seem that both sides are moving together in the same direction. Okay, but somebody should make up their mind -- either way -- and stop fiddling around.
Barry Diller is back at it. The chairman and CEO of IAC/InteractiveCorp, who is also chairman of the board and a senior advisor to Expedia, is working to take online travel firm Expedia private at $30 a share. Part of any deal will involve Expedia's TripAdvisor being spun off with about 400 jobs being lost in that shuffle.
After many, many laps around the track, this race is over, as race track and casino operator Penn agreed to be acquired today by Fortress Investment Group LLC (NYSE: FIG) and private equity firm Centerbridge Partners. All cash, baby, in a deal worth $8.9B that includes $2.8B of assumed debt. Everyone to the Winner's Circle.
I have not written a Chasing Value post for quite a while because I could not find anything to brag about for a couple of weeks, but then I found something hiding in plain sight.
Few things are more plain and simple than drywall. The same can be said for the purity of this stock from a value perspective. I have been watching USG Corp (NYSE: USG) for a while and today I bought it for $52. I should have bought it last week but other priorities prevented it.
Looking at the stock fundamentals I did a double take because it all seems too good to be true. Starting with the following chart, I remind readers that I am not a technical analyst and don't believe in it, however I do look at charts for two features that are best represented graphically and allow you to see the story quickly.
Last year I wrote a very positive Chasing Value article suggesting that USG Corp (NYSE: USG) looked like a value proposition when it was trading around $52 a share. We bought it and to say we were way too early would be very very kind because it dropped with the market in the summer and has only recovered slightly.
Earlier in the week I posted about 
According to an ominous story on Bloomberg.com this morning, 
Furniture Brands
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Wal-Mart's launch of $20 slimming jeans will be a huge success
Why I spent some of my stimulus check on GE
Why the dollar will keep falling
