USG Corporation: Prospects Look Good

USG Corporation (USG) - This producer and distributor of a range of building materials, which are used in construction, repair and remodeling, is North America’s largest maker of gypsum wallboard.

What I Like

USG is currently priced at $12.03 making it very attractive. This company is coming off a 52-week high of $35.00 only last summer and tumbled like the rest of the market due to huge concerns.. It is currently on an uptrend when valued against both the 50-Day Moving Average ($10.77) and 200-Day Moving Average ($9.65).  It has huge room to grow and these are the reasons why. USG is expected to decline in 2009 by 17% due to the downsize in volume however on the contrary in 2010 expectations have numbers increasing substantially driven by increases in capital expenditures. USG has seen an increase in home improvements in 2009 with more to come in 2010 raising the earnings expectations of the company. As a result of USG’s aggressive cost cuts I expect an upturn in sales leading to profitability in 2010. Overall, my buy recommendation for USG is based upon attractive valuations, long-term prospective within the sector, and due to USG’s below market P/E they have a very attractive upside potential. Volume is above 100,000, which is the threshold in which I set. Another plus is the company is not in debt and has half a billion in cash on hand top help expand their worldwide brand. Like we know, Cash is King. This company is the leader in its sector and recently been upgraded by many analysts yet the stock still has huge gains to come.

Sector Outlook

My fundamental outlook for construction and engineering remains Bullish, USG is a leading player within this sector. As the recession is slowly coming to an ending point we are seeing a resurgence in renewed spending, both from the public and private sector, in oil and gas projects as well as major infrastructure projects worldwide. We are also seeing a stabilization among housing prices resulting in many renovations of older houses along with the development of news ones which all bodes well for USG’s business plan. Along with this U.S. Government has pledged billions in stimulus dollars to transform the U.S. infrastructure system. Since FDRs huge infrastructure projects the U.S. has put the upkeep and renewal of infrastructure on a backburner of things to do. Well now Obama is striking back pledging billions on billions to reform the public transportation of America. I expect Long-Term growth in the sector, as companies such as USG should benefit from new infrastructure projects such as new super-highways, high speed rails, etc which appear to be at the beginning of a renewed up cycle. I expect capital spending for highways, tunnels and bridges to be aided in part by state and local government bond issues, and increased federal spending. I see the emerging markets picking up as well with Latin America, Asia, Eastern Europe and the Middle East greatly expanding with large projects with intentions on energizing growth and prosperity. I expect the industry to see basic fluctuations due to the continued uncertainties of the global economy however, valuations for the sector are at historical low levels where long-term prospects are very favorable. I think we think these companies will outperform the market substantially.

Risks

Basic risk against USG are insufficient amount of funds due to tight capital markets making it hard to fund and supply projects result in delays and cancellations, weakened overall housing market, and lack of support by government’s stimulus plan.

Overview

USG Corporation (USG) is about to deliver some big time results due to the fact that the whole sector is greatly undervalued. I project a 12-month target price of $19.

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