Why USG Corporation Stock Got Built Up Today

Before you go, we thought you'd like these...
Before you go close icon

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of USG Corporation broke through a wall today, rising as much as 4.3% and hitting a new 52-week high following much better than expected results from Owens Corning .

So what: As the largest distributor of wallboard and manufacturer of gypsum products in the United States, any positive news from related companies such as Owens Corning bodes well for USG. Owens Corning makes and sells fiberglass insulation and roofing-related products which tend to have similar demand curves

Owens Corning's adjusted earnings per share quadrupled from $0.11 to $0.44 in the fourth quarter on a sales increase of 10.3%, in part due to improved pricing. CEO Mike Thaman credited the success with "benefiting from a stable and growing global economy and a recovering U.S. housing market." He expects more growth in 2014.

Now what: Similar to Owens Corning's 10.3% sales gains with 300% earnings gains, USG's earnings tend to rise much faster than its sales. As volumes of demand for wallboard improves by relatively small amounts, the market prices that USG realizes tend to skyrocket. All other things being equal, for every $1.00 increase in the price of wallboard is $1.00 that tends to the bottom line (pre-tax).

If Owns Corning's outlook proves to be correct, look for wallboard prices to continue to escalate and USG's earnings to potentially explode. Last year was the first time USG reported full-year net income since 2007, right before the housing collapse. Don't be surprised to see analysts raise their per-share guidance for full-year-2014 earnings.

Analysts currently expect a 158% rise in earnings per share for this year, which are currently at $1.73 compared to $0.67 last year. USG has a forward P/E under 20, even less if analysts raise estimates -- this looks cheap when considering realized and further expected earnings growth. However, Fools need to be cautious for the long term; the pendulum swings both ways. Whenever residential and commercial construction activity starts to get even mildly weak, wallboard prices usually crash as fast, or faster, than they went up.

Be prepared for the next housing crash
Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.

The article Why USG Corporation Stock Got Built Up Today originally appeared on Fool.com.

Nickey Friedman owns shares of USG. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners