USG
A Brief Financial Analysis of the United States Gypsum Company Jason Walter Decha Robinson December 10th 2004 BA 5400 Finance Dr. Lekvin
Company Profile
USG is a leading manufacturer of building materials for the construction and remodeling industries. Their products are used in everything from major commercial developments and residential housing to simple home improvement projects. As the inventor of wallboard and ceiling tile, USG created North America's building materials industry. Their flagship brands include SHEETROCK® gypsum panels and DUROCK® cement board, which are recognized around the world. USG’s steadfast commitment to the company's core business beliefs– integrity, safety, performance, quality, diversity, innovation and service–have helped us become the $3 billion Fortune 500 company they are today.
www.usg.com
USG History
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One hundred years ago, the gypsum business in North America was fragmented into regional markets. In 1902, thirty independent gypsum rock and plaster companies merged to form the United States Gypsum Company. USG consolidated their resources and combined the operations of thirty-seven mining and calcining plants producing agricultural and construction plaster. In 1916 the first “sheetrock” panel was produced, a nonwarping, non-burning wall covering. From then on, USG has been the innovator in construction materials in the United States.
www.usg.com
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Chapter 11 Protection
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USG is currently addressing their asbestos liability through Chapter 11 to preserve and strengthen their business
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USG has asbestos liability that traces its roots to some building products that they stopped selling over 20 years ago. More than 25 companies had been forced into bankruptcy by asbestos litigation since claims started surfacing in the 70s.
All of USG’s operations continue to operate normally, without interruption. Daily operations continue, plants and facilities remain open and transactions which occur in the normal course of business go on as before.
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Risks
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the ongoing asbestos lawsuits are a big risk for USG length required for their Chapter 11 Restructuring is undetermined sales are correlated to the building industry which is affected by thing such as
Weather Interest Rates Consumer Spending
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Valuation Measures
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Market Cap (Intraday) ► Return on Equity (ROE) ► Return on Assets (ROA) ► Stock Price ► Shares Outstanding
1.46B 17.71% 3.33% $34.99 43.02 Million
Stock Price History
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Beta 52-Week Change 52-Week Change (Relative to S&P500) ► 52-Week High (2-Dec-04) ► 52-Week Low (11-May-04)
2.156 125.28% 99.28% 36.90 12.30
Consolidated Statement of Cash Flows from the 2003 USG Annual Report
Consolidated Statement of Earnings from the 2003 USG Annual Report
Consolidated Balance Sheets from the 2003 USG Annual Report
Projected Cash Flows
USG CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW - PROJECTED (millions) OPERATING ACTIVITIES Net earnings Adjustments to reconcile net earnings to net cash: Cumulative effect of accounting change Provision for impairment and restructuring Depreciation, depletion and amortization Deferred income taxes (Increase) Decrease in working capital: Receivables Income taxes receivable Inventories Payables Accrued expenses Increase in other assets Increase in other liabilities Change in asbestos receivable and reserve Decrease in liabilities subject to compromise Other, net Net cash provided by operating activities INVESTING ACTIVITIES Capital expenditures Purchases of marketable securities Sale or maturities of marketable securities Net proceeds from asset dispositions Acquisition of businesses Net cash uses for investing activities 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 133 Assume 56 Was Appx. 11 2.36 Assume 87 Assume (11) Assume (26) Assume (3) Assume 148 Assume 30 Assume (14) Assume 24 Assume (16) Assume (42) Assume 7 16 11 112 59 (34) (12) (5) 12 (37) (25) 53 19 (29) (2) 271 110 56 115 87 (11) (26) (3) 148 30 (14) 24 (16) (42) 7 465 139 56 117 87 (11) (26) (3) 148 30 (14) 24 (16) (42) 7 496 169 56 120 87 (12) (26) (3) 148 30 (14) 24 (16) (42) 7 529 202 56 123 87 (12) (26) (3) 148 30 (14) 24 (16) (42) 7 564 237 56 126 87 (12) (26) (3) 148 30 (14) 24 (16) (42) 7 601 275 56 129 87 (13) (26) (3) 148 30 (14) 24 (16) (42) 7 642 315 56 132 87 (13) (26) (3) 148 30 (14) 24 (16) (42) 7 685 359 56 135 87 (14) (26) (3) 148 30 (14) 24 (16) (42) 7 731 405 56 138 87 (14) (26) (3) 148 30 (14) 24 (16) (42) 7 781 456 56 141 87 (14) (26) (3) 148 30 (14) 24 (16) (42) 7 834
Assume (107) Assume (247) Assume 125 Assume 2 Assume (15)
(111) (256) 194 2 (20) (191)
(107) (247) 125 2 (227)
(107) (247) 125 2 (227)
(107) (247) 125 2 (227)
(107) (247) 125 2 (227)
(107) (247) 125 2 (227)
(107) (247) 125 2 (227)
(107) (247) 125 2 (227)
(107) (247) 125 2 (227)
(107) (247) 125 2 (227)
(107) (247) 125 2 (227)
Project Statement of Earnings
USG CORPORATION CONSOLIDATED STATEMENT OF EARNINGS - PROJECTED Average Growth Rate 2001-2003 (%) 5.46 4.14 7.84 -50.38 -10.00 Assume (9) Assume 40% Assume (56) (millions) Net sales Cost of product sold Selling and admin. Expenses Operating profit Interest expense Interest income Other (income) expense, net EBIT and cumulative effect of accounting change Income taxes Earnings before cumulative of accounting change Cumulative effect of accounting change Net earnings 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 3,666 3,866 4,078 4,300 4,535 4,783 5,044 5,320 5,611 5,917 6,241 3,121 3,250 3,385 3,525 3,671 3,823 3,982 4,147 4,319 4,498 4,684 324 349 377 406 438 472 510 549 593 639 689 221 267 316 369 426 487 553 624 700 781 868 6 3 1 1 0 0 0 0 0 0 0 (4) (4) (3) (3) (3) (2) (2) (2) (2) (2) (1) (9) (9) (9) (9) (9) (9) (9) (9) (9) (9) (9) 228 276 327 380 437 498 564 635 710 791 878 79 110 131 152 175 199 226 254 284 317 351 149 166 196 228 262 299 338 381 426 475 527 (16) (56) (56) (56) (56) (56) (56) (56) (56) (56) (56) 133 110 140 172 206 243 282 325 370 419 471
Valuation Variables
► Market risk free rate ► Market risk premium rate ► Market Beta ► 1-5 year growth rate ► 6-10 year growth rate ► Terminated growth rate ► Number of outstanding share ► Required return ► Estimated value per share ► Current value (as Dec. 2, 2004)
3% 5% 2.1 -7.19%, 9.64% 10.14% 5% 43.02M 13.5% $24.03, $48.74 $34.99
Determination of FCF
Normalized net income + Normalized depreciation - Normalized capital expenditure = Free Cash Flow $122 $112 $111 $123
Valuation from Cash Flows
USG Corporation Cash flow from Operation Cash flow from Investing Free cash flow Cash flow growth rate Risk-free interest rate: Market risk premium: Beta per USG (1.0 = market) Required return Cash flow growth rate years 1 through 5 (cash flow estimate) Cash flow growth rate years 6 through 10 Terminal growth rate after year 10 (guess) Number of shares outstanding (million) Cash Flow Structure: Steady 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 State Value "----------------------------------------------------------------------- t + " " -------------------------------------------------------------------------t=last year 1 2 3 4 5 6 7 8 9 10 at End of Year 10 123 114 106 98 91 85 93 103 113 125 137 1,696 101 82 67 55 45 44 42 41 40 39 478 2003 271 -191 80 2004 465 -227 238 196.92% 2005 496 -227 269 13.08% 2006 529 -227 302 12.26% 3.00% 5.00% 2.1 13.50% -7.19% 10.14% 5.00% 43.02 Estimated value per share Current Market price 2007 564 -227 337 11.66% 9.64% 2008 601 -227 374 11.18% 2009 642 -227 415 10.78% 2010 685 -227 458 10.42% 2011 731 -227 504 10.11% 2012 781 -227 554 9.82% 2013 834 -227 607 9.57% 10.14%
$24.03
$34.99 (as Dec. 2, 2004)
Date Amount Discounted to today
Data from year 2003 + Normalized Net Income + Normalized depreciation & other non cash expenses - Normailized capital expenditure require to maintain exisitng operation
122 112 111 123
Analyst Valuation
USG Corporation Cash flow from Operation Cash flow from Investing Free cash flow Cash flow growth rate Risk-free interest rate: Market risk premium: Beta per USG (1.0 = market) Required return Cash flow growth rate years 1 through 5 (analyst estimate) Cash flow growth rate years 6 through 10 Terminal growth rate after year 10 (guess) Number of shares outstanding (million) Cash Flow Structure: Steady 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 State Value "----------------------------------------------------------------------- t + " " -------------------------------------------------------------------------t=last year 1 2 3 4 5 6 7 8 9 10 at End of Year 10 123 135 148 162 178 195 214 234 257 282 309 3,814 119 115 111 107 103 100 97 93 90 87 1,075 2003 271 -191 80 2004 465 -227 238 196.92% 2005 496 -227 269 13.08% 2006 529 -227 302 12.26% 3.00% 5.00% 2.1 13.50% 9.64% 10.14% 5.00% 43.02 Estimated value per share Current Market price 2007 564 -227 337 11.66% 9.64% 2008 601 -227 374 11.18% 2009 642 -227 415 10.78% 2010 685 -227 458 10.42% 2011 731 -227 504 10.11% 2012 781 -227 554 9.82% 2013 834 -227 607 9.57% 10.14%
$48.74
$34.99 (as Dec. 2, 2004)
Date Amount Discounted to today
Data from year 2003 + Normalized Net Income + Normalized depreciation & other non cash expenses - Normailized capital expenditure require to maintain exisitng operation
122 112 111 123
Recommendation
if price is below $18 ► Hold from $24 - $50 ► Sell if price is above $50
► Buy
Five Year Stock Price History
Annual Report 2003
Three Month Stock Price History
Now
Project Start
Questions?