I’ve added USG to my stokblogs account.  I’d like to take a moment to go over my reasoning for this investment.  USG is on the hook for personal injury liabilities for a former subsidiary which produced asbestos.  Last year, these liabilities were quantified within specific limits and a plan regarding their resolution was formed.  In the plan, USG transfers 3.95 billion dollars and all future asbestos personal injury liability claims to a trust.  The trust is funded as follows:
-    The Reorganized Debtors paid $890 million to the Trust and issued to the Trust an interest-bearing note in the amount of $10 million, payable no later than December 31, 2006; and
-    The Reorganized Debtors also issued to the Trust a contingent payment note in the aggregate principal amount of $3.05 billion, which will be payable to the Trust depending upon whether the Fairness in Asbestos Injury Resolution Act of 2005 or substantially similar legislation creating a national trust or similar fund (collectively, the "FAIR Act") is enacted by the 10th day (excluding Sundays) after final adjournment of the current term of Congress (the "Trigger Date"), as described more fully below.  (They estimate this date to be no later than sometime in December 2006)

The Debtors propose to fund their obligations under the Plan through (i) cash and marketable securities accumulated since the Petition Date which were used to fund the $890 million payment to the Trust as well as other creditor payments made prior to June 30, 2006, (ii) the Rights Offering, (iii) anticipated tax refunds and (iv) new debt financing.

The rights offering they refer to is an offering they had this year where they gave all their shareholders the right to purchase another share of the company for $40.  This raised 1.725 billion.  They have 587 million in cash and 69 million in marketable securities.  Totalled up: 2.381 billion.  I’m going to ignore the tax refunds, although they should be substantial, because I don’t know exactly how much of them will be realized.  I’m also ignoring the cash flow of business operations.  The difference between the 3.05 billion they need to raise and the 2.381 billion they have available is 669 million.  They have a 2.8 billion dollar credit agreement with a syndicate of banks.  Most of the credit holds an interest rate of somewhere around less than one percent above LIBOR.  Let’s assume an unnecessarily large interest rate of 10 percent and assume they hold the 669 million they need for two years. They paid 37 million in interest last quarter.  In the next two years, interest payments liberally calculated would be about 281.8 million.  Operating profit this past quarter was 318 million.  This company does not have a solvency problem.

So, then the company can be evaluated as a going concern.  The company is a business in what I think is a commodity industry.  It returns net income after tax which is 19% on net tangible assets minus cash. It has a dominant position in North America in dry wall and panel ceilings, which in a commodity business is one of the only ways you can have any kind of an economic advantage.

176 million net income in most recent quarter = 706 million/year
Assume 20% drop in net income as result of cooling housing market: 564.8 million/year
Subtract the expected interest payments as calculated above: 497.9 million/year

Assume the company will be spending the next two years putting all it’s cash flow towards recovery.  Assume the company will only be in business for another 15 years after that with cash flow increasing at a moderate rate of 5%.  Also assume discount rate is 6.5% (increased government rate).

DCF calculation gives value of 6.2 billion.  Market cap is around 89,849,000 shares outstanding X approx $47/share = 4.2 billion.  32% discount to intrinsic value on extremely conservative basis.  There’s a lot of potential gravy to be had here if this near-worst case scenario doesn’t come to pass.  Otherwise, you’re buying what appears to be a great business at a good price.

-FKS