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USG: Shaken But Not Unnerved
USG Corporation (NYSE:USG) is on the front lines of the housing storm composed of falling home values, foreclosures and a swell of unsold inventory homes produced by homebuilders. As a key player in the manufacturing of building materials including drywall, ceiling and floor systems, the decline in housing and commercial real estate development has landed right on USG's chin, by negatively impacting domestic and international sales. Let's take a look at a couple of key ratios and market conditions investors should pay attention to before the bad news we're used to takes a positive turn.
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Signs of Improvement
Granted, layoffs and operating losses are not positive signals of future growth, but USG has managed to build forward momentum. USG did announce its intention to layoff 900 late last year, as its stock price fell down to the single digits. However, their most recent quarterly earnings report for the first quarter of 2009 reveals signals of improvement. Although sales were down for the first quarter to $864 in comparison to $1.2 billion in sales during the same time period a year ago, USG's operating loss improved 30%, from $60 million in 2008 to $42 million. The improvement was tied mainly to higher prices for its wallboard products along with a reduction in selling and administrative expenses. (For more, see How Investors Can Screen For Stock Ideas.)
The Stats
USG has an attractive price-to-book ratio of 0.80 and a low price-to-sales ratio of 0.30. The price-to-book ratio can be used to determine the value of a company if it were sold today against its current stock price. A price-to-book ratio below one suggests a stock is currently undervalued. Likewise a low price-to-sales ratio can also suggest that a stock is undervalued in terms of its stock price relative to is sales over the past 12 months. While no single valuation can paint a complete picture, these are a couple of ratios investors can utilize. Other construction company & material suppliers with relatively low price-to-book ratios include MDU Resources Group (NYSE:MDU), Vulcan Materials (NYSE:VMC), Valspar (NYSE:VAL), Granite Construction (NYSE:GVA) and Sterling Construction (Nasdaq:STRL).
The Market
According to the U.S. Department of Commerce, construction spending during March 2009 was up slightly on a seasonally adjusted basis, while construction spending during the first quarter of 2009 was 10.9% below the same time period a year ago.
Final Thoughts
When construction spending will begin to improve is difficult to ascertain, but the rules of investing in undervalued companies remain the same. USG's reputation for providing reliable materials to the construction industry place them in a position to a benefit from recovery making the company's stock recent pullback as a signal for investors to take notice. (For further reading, see Economic Indicators To Know.)
Signs of Improvement
Granted, layoffs and operating losses are not positive signals of future growth, but USG has managed to build forward momentum. USG did announce its intention to layoff 900 late last year, as its stock price fell down to the single digits. However, their most recent quarterly earnings report for the first quarter of 2009 reveals signals of improvement. Although sales were down for the first quarter to $864 in comparison to $1.2 billion in sales during the same time period a year ago, USG's operating loss improved 30%, from $60 million in 2008 to $42 million. The improvement was tied mainly to higher prices for its wallboard products along with a reduction in selling and administrative expenses. (For more, see How Investors Can Screen For Stock Ideas.)
USG has an attractive price-to-book ratio of 0.80 and a low price-to-sales ratio of 0.30. The price-to-book ratio can be used to determine the value of a company if it were sold today against its current stock price. A price-to-book ratio below one suggests a stock is currently undervalued. Likewise a low price-to-sales ratio can also suggest that a stock is undervalued in terms of its stock price relative to is sales over the past 12 months. While no single valuation can paint a complete picture, these are a couple of ratios investors can utilize. Other construction company & material suppliers with relatively low price-to-book ratios include MDU Resources Group (NYSE:MDU), Vulcan Materials (NYSE:VMC), Valspar (NYSE:VAL), Granite Construction (NYSE:GVA) and Sterling Construction (Nasdaq:STRL).
The Market
According to the U.S. Department of Commerce, construction spending during March 2009 was up slightly on a seasonally adjusted basis, while construction spending during the first quarter of 2009 was 10.9% below the same time period a year ago.
Final Thoughts
When construction spending will begin to improve is difficult to ascertain, but the rules of investing in undervalued companies remain the same. USG's reputation for providing reliable materials to the construction industry place them in a position to a benefit from recovery making the company's stock recent pullback as a signal for investors to take notice. (For further reading, see Economic Indicators To Know.)
by
Gregory S. Davis
Gregory is a freelance writer for Investopedia.com. He has a consulting background in the banking, telecommunications and healthcare fields. Gregory is a graduate of the Wharton School of Business. Click here to visit his website.
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