In 2006, Warren Buffett spotted a bargain. Just a few months earlier, USG (USG) had emerged from five years in bankruptcy, and its stock had lost more than half its value, falling from more than $115 to less than $50. The chief executive of Berkshire Hathaway (BRKA) had enriched himself on USG before: He had picked up 15% of the wallboard maker in late 2000 at an average share price of $15. Hoping to score again, Buffett spent some $165 million for 3.5 million additional shares. But lightning didn't strike twice.
Today, USG shares fetch $34 apiece. With Sheetrock production and prices plummeting—homebuilding is in collapse, after all—the company lost $73 million in the past two quarters, and industry analysts expect the losing streak to continue into 2009. Revenue might bottom out at $4.6 billion next year, after declining three years in a row. And if the analysts are right, USG's shares will be worth no more than $40 a year from now. "Frankly," says William Foote, chairman and chief executive since 1996, "we've been caught in a perfect storm."
So where are the angry mobs of shareholders clamoring for new leadership or a new direction? Not at USG's annual meeting, that's for sure. Thirty minutes after Foote welcomed investors to the company's new Chicago headquarters in early May, he adjourned the meeting without having heard a single comment from the audience. Peter Supino, a portfolio manager with Weitz Funds in Omaha, which has a 3% stake in USG, has no complaints. "We think this company is built to last and believe it will make an awful lot of money during the next positive cycle," he says.
Idle Capacity
Foote, too, takes the long view. Short term, the numbers are bleak. Home starts fell 32% in May from a year earlier, the government reported on June 17. But in a couple of years, Foote believes, the market will bounce back, and when it does, USG—with its dominant market share, high-quality reputation, and well-situated and efficient plants—will be a hot stock once more, he says. To get ready, the company plans to open a new factory in central Pennsylvania later this year and is spending $200 million to build another near Sacramento.
Meantime, Foote is also slashing expenses to minimize losses. Over the past 18 months, he has reduced USG's head count by 1,700, to 14,000, and idled almost a third of the company's drywall-making capacity. Its plant in East Chicago, Ind., for instance, is operating just three days a week. But with such retail customers as Home Depot (HD) and Lowe's (LOW) lowering their own financial forecasts, he may have to cut even deeper before the cycle turns.