BargainValueHunter Posted September 10, 2011 Share Posted September 10, 2011 http://www.smartmoney.com/invest/stocks/what-does-warren-buffett-know-that-you-dont-9500/ Sure, slowing home sales have depressed such stocks, possibly making them look like bargains to the canny value investor. But his latest purchase has analysts scratching their heads. The price of drywall, also called wallboard, has been falling all year, hurting USG's bottom line. But far more ominous, USG faces the prospect of paying out hundreds of millions of dollars in asbestos liability claims over the next few years. No one knows how much it will ultimately shell out, but the shadow of similar asbestos-related damages has forced one company into bankruptcy and caused the stock prices of several others to plummet this year. "The conventional wisdom is that the asbestos problem will only get worse," says John Kasprzak of BB&T Capital Markets, who has a Hold rating on USG stock. As he said, that's the conventional wisdom. But here's where things get really interesting. Remember that Buffett's Berkshire has extensive insurance holdings. Among them is General Star Indemnity, which underwrote you guessed it asbestos policies. It isn't certain whether the underwriters and actuaries who handle General Star's asbestos liability policies talked to anyone who makes Berkshire's investing decisions (and Berkshire doesn't comment on those decisions). But what seems certain is that Buffett must be more comfortable than most analysts with the level of asbestos-related damages USG will ultimately face. http://articles.moneycentral.msn.com/Investing/CompanyFocus/BattleOfTheBillionaires.aspx Analysts who think Buffett's USG gamble is correct say that the housing downturn is so well known that there's not much downside risk left in the stock. "The whole world has figured that out," says CL King & Associates analyst Jim Barrett. "Everyone knows we are at the top of the cycle, and the stock has sold off severely." By some measures, USG's stock is clearly a value. Analysts like to evaluate economically sensitive companies by comparing enterprise value (EV) to cash flow. (EV is calculated by adding market cap and debt and subtracting cash.) USG trades for an EV that's about 4.4 times its $1.1 billion in cash flow. Here's how cheap that looks now. Back in the mid-1990s -- when dreaded asbestos liabilities still hung over USG -- the company had an enterprise value of five times cash flow. A wallboard company called BPB was recently taken private for an enterprise value of 8.4 times cash flow. And capacity may not be all it's cracked up to be, says Barrett. When wallboard companies build new plants, they will also close older, less efficient ones. And much of the capacity is being built on the East Coast, so it won't affect pricing in other regions (wallboard is so heavy it is hard to ship it long distances). And the new plants are coming on line over two years. By the time they're up and running, the housing market could be back on its feet. Link to comment Share on other sites More sharing options...
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