BlastInvest.com!
Blast Investor
Real-time Plus
by
Henry Lu
Trade
Alert: USG - a gem under lawsuit
9/30/2004
This
issue is trade alert issue as well as regular semi-monthly regular
issue.
Today I purchased 700 shares of USG at $18.25 for Blast Investor Model
Portfolio. Below is the rational for this new investment.
USG is gem of distressed stocks under lawsuit
USG got my interest months ago because Warren Buffett has invested in
this stock for quite a while. Currently Warren Buffett owns about 15% of
the USG stocks as of June 2004 filling. I waited and did not
invest into it before because I thought the time or price was not
right. Now I believe this is the time at right price and at right
time to invest
into this distressed stock.
USG is a company that manufacture building materials. USG filed
bankruptcy protection in 2001. The main reason of filling is due to
huge
cost of asbestos lawsuit. The bankruptcy is still in court and it
will be years before it can emerge from it. USG products during 70's
and
60's contained asbestos, which caused cancer and numerous other
diseases. USG had paid asbestos claims before 2001 every year in
hundreds of millions. USG has more than 2 billion of dollar
of asbestos liability on balance sheet based on its own
estimate. The real cost could be much bigger than USG's own
estimate. The
uncertainty of asbestos lawsuit make this stock very cheap. USG has PE
of 3.5.
Essentially, USG investment is really
a bet on litigation of asbestos.
Congress will bail out USG
On Sept 15, 2004, Senate majority and minority leader both agreed in
principle of 140 billion dollar asbestos fund method for compensating
the asbestos patients. Although the bill has not passed, I believe it
will pass eventually. Right now the difference between Democrats and
Republicans are very minor on this issue. The details of bill
can be found in US congress web site, here is the key point of the
bills:
- Current legal system is broken. The estimated total cost will be
130 billion. But under current lawsuit system, asbestos sufferers only
get 60 billions, the rest goes to lawyers or other fees. Patient have
to wait for 6-7 years before they get payment from lawsuit. Many died
before they win lawsuit. Many who do not have disease still sue
for asbestos compensation, which is not fare in that sick people do not
get money quickly while non-sick people clogged and slowed US
government court system. US Supreme court had begged congress to enact
new law to solve the current broken asbestos lawsuit tort system.
- US Federal government will set up fund of up to 140 billion trust
fund to pay asbestos patients quickly The money will be obtained from
liable insurance or liable company such as USG. USG
will not be sued after the trust fund is up.
- The contribution will require 27 years of annual payment. $140
billion will be more than enough to pay current or future asbestos
claims according to medical and economical and statistical scientific
studies.
- USG annual contribution of the fund will be 1.5% of 2002 revenue,
or 52 million a year. After first 5 years, the annual
contribution can be reduced to below 1%.
- It is very unlikely that after 27 years, the trust will run out
of money. But if remotely there is no money left after 27 years, the
suffers then can sue for money after27 years.
- Under Senate bill, USG only need to pay 52 million annually for
1st 5
years and less between 6th and 27th years.
Financial modeling of USG as if the bill was law since 1991
Under Senate bill, USG only need to pay 52 million annually for 1st 5
years and less between 6th and 27th years.
Before bankruptcy filling, USG owed about 500 million bank debt. The
current cash can pay down all debt. Assuming 52 million a year
asbestos cost as if from 1991, below is my adjusted hypothetical USG
Earning per year over past decades. Because USG had complicated book
due to merger, asbestos cost etc, the reported number is not used.
Currently USG reported earning is $5.16. By adjusting the payment
for asbestos under the bill, the earning will be $4.23 at true PE of
4.3.
1995 - 2003 average adjusted pro forma EPS as if Senate bill was law
since 1991 is $5 per share. Apply PE = 8, USG is worth $40 a
share.
Note the margin % up or down during booming or bust of economics.
USG
|
03Jun-04Jun
|
2003
|
2002
|
2001
|
2000
|
1999
|
1998
|
1997
|
1996
|
1995
|
1994
|
1993
|
1992
|
1991
|
Revenue(million)
|
4000
|
3666
|
3468
|
3296
|
3781
|
3810
|
3342
|
2874
|
2590
|
2444
|
1209
|
1261
|
1777
|
1712
|
Pro Forma Operating
profit
before interest,
tax, lawsuit (millions)
|
350
|
221
|
272
|
135
|
531
|
730
|
585
|
506
|
377
|
359
|
219
|
79
|
99
|
133
|
Pro Forma
Operating margin
|
8.8%
|
6.0%
|
7.8%
|
4.1%
|
4.8%
|
19.16%
|
17.5%
|
17.6%
|
14.55%
|
14.69%
|
18.11%
|
6.3%
|
5.6%
|
7.77%
|
Hypothetical EPS
after
estimated
interest,
tax, Senate-proposed
asbestos contribution
|
$4.23
|
$2.40
|
$3.12
|
1.18
|
$6.80
|
$9.62
|
$7.56
|
$6.44
|
$4.61
|
$4.36
|
$2.37
|
0.38
|
0.67
|
$1.15
|
USG profit margin is going up
USG business is cyclical. If US economics recovers and USG profit
margin goes up to 17 - 20% level, USG can make $10 a share profit in 5
- 6 years. While USG worth $40 a share, my target for USG could be as
high as $100 a share in 5-8 year with PE = 10.
Bankruptcy is not concern
USG benefit from bankruptcy. USG common shares is not likely to be
canceled out because USG is not insolvent. There are many future
asbestos patients that need money from USG so that court is not likely
to liquidate USG. Court is likely to wait for US congress bill on this
issue or rule in similar fashion as the bill does to setup trust fund
to pay future claims.
Buffett is not likely to steal USG
Buffett owns about 15% of USG. What if Buffett make a hostile bid and
take USG private at cheap price, say $25 a share? Buffett did that too
to Clayton homes and other companies. Although I respect and admire
Buffett a lot, Buffett is threat to USG current shareholders for bigger
profit.
Fortunately, It is not likely. The current USG board of directors set
up a right offering in that if any large shareholders control more than
15% of USG, other shareholders has right to buy USG at 50% discount.
Now USG at $18, if Buffett secretly buy more USG, we can use the right
to buy USG at $9 a share. Buffett will not dare to buy more, therefore
Buffett will not likely to control board of directors of USG.
Conclusion
Buy USG for the long run. USG has very strong business and balance
sheet. It can double or triple or maybe more in 5-6 years.
Blast
Investor Model
Portfolio Update
Blast
Model
Portfolio - Performance (as of 7/30/2004) :
|
|
Portfolio
inception date
|
12/31/2003
|
Portfolio
inception value
|
$89,000
|
2004 YTD
Performance
|
22.10% |
S&P500
Index 2004 YTD Performance
|
-0.09% |
Blast
Model
Portfolio - Open Positions (as of 7/30/2004) :
| Symbol |
Last |
Shrs |
Value |
Paid |
Gain |
| ADGO.OB |
1.10 |
9,000 |
$9,900.00 |
0.78 |
$2,870.00 |
+40.83% |
| CHK |
15.82 |
1,100 |
$17,402.00 |
13.90 |
$2,102.00 |
+13.74% |
| HRB |
49.62 |
350 |
$17,367.00 |
54.00 |
-$1,543.00 |
-8.16% |
| LIBHA.PK |
4.50 |
1,200 |
$5,400.00 |
5.10 |
-$730.00 |
-11.91% |
| NEN |
80.50 |
100 |
$8,050.00 |
54.00 |
$2,640.00 |
+48.80% |
| NRG |
26.67 |
670 |
$17,868.90 |
23.05 |
$2,415.40 |
+15.63% |
| NTES |
38.12 |
350 |
$13,342.00 |
36.60 |
$522.00 |
+4.07% |
| SOHU |
16.74 |
700 |
$11,718.00 |
24.882857 |
-$5,720.00 |
-32.80% |
| USG |
18.32 |
700 |
$12,824.00 |
18.31 |
-$3.00 |
-0.02% |
| WLL |
30.36 |
600 |
$18,216.00 |
22.683333 |
$4,586.00 |
+33.65% |
| $$CASH |
-23,421 |
-$23,421.00 |
- |
- |
- |
|
|
$108,666.91 |
|
|
|
|
|
Model
Portfolio
Transactions
| Sep
30, 2004 |
Buy |
USG |
700 |
18.31 |
10.00 |
12,827.00 |
-
|
| Sep
29, 2004 |
Sell |
NEN |
100 |
79.65 |
10.00 |
7,955.00 |
+ 47.5% |
| Aug
5, 2004 |
Buy |
WLL |
250 |
23.50 |
10.00 |
5,885.00 |
-
|
| Aug
2, 2004 |
Sell |
NEN |
100 |
69.95 |
10.00 |
6,985.00 |
+ 29.5% |
| Jun
17, 2004 |
Sell |
HCA |
250 |
40.30 |
10.00 |
10,065.00 |
- 4% |
| Jun
17, 2004 |
Buy |
NRG |
670 |
23.05 |
10.00 |
15,453.50 |
-
|
| May
24, 2004 |
Sell |
ADGO.OB |
13,000 |
1.55 |
10.00 |
20,140.00 |
+ 98.7% |
| May
10, 2004 |
Sell |
HCA |
250 |
39.97 |
10.00 |
9,982.50 |
- 4.8% |
| May
10, 2004 |
Buy |
SOHU |
200 |
15.59 |
10.00 |
3,128.00 |
-
|
| Mar
5, 2004 |
Buy |
WLL |
350 |
22.10 |
10.00 |
7,745.00 |
-
|
| Jan
26, 2004 |
Sell |
WRP |
700 |
17.40 |
10.00 |
12,170.00 |
- 5% |
| Dec
31, 2003 |
Buy |
CHK |
1,100 |
13.90 |
10.00 |
15,300.00 |
-
|
| Dec
31, 2003 |
Buy |
NEN |
300 |
54.00 |
10.00 |
16,210.00 |
-
|
| Dec
31, 2003 |
Buy |
HRB |
350 |
54.00 |
10.00 |
18,910.00 |
-
|
| Dec
31, 2003 |
Buy |
NTES |
350 |
36.60 |
10.00 |
12,820.00 |
-
|
| Dec
31, 2003 |
Buy |
SOHU |
500 |
28.60 |
10.00 |
14,310.00 |
-
|
| Dec
31, 2003 |
Buy |
LIBHA.PK |
1,200 |
5.10 |
10.00 |
6,130.00 |
-
|
| Dec
31, 2003 |
Buy |
ADGO.OB |
22,000 |
0.78 |
10.00 |
17,170.00 |
-
|
| Dec
31, 2003 |
Buy |
HCA |
500 |
42.00 |
10.00 |
21,010.00 |
-
|
| Dec
31, 2003 |
Buy |
WRP |
700 |
18.30 |
10.00 |
12,820.00 |
-
|