Buffett's USG Bet Hits a Wall

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Foote has worked through tough times before. In 2001, as USG was fighting off economic recession, the company declared Chapter 11 bankruptcy to shelter itself from a deluge of personal-injury claims related to asbestos that had been in wallboard compound for decades. The filing was USG's second since Foote started at the company as a division head in 1984. That earlier bankruptcy, the result of piling on too much debt to avoid a takeover, occurred in 1993.

A Wild Ride in the Industry

The gut-wrenching lows have been matched by breathtaking highs. As construction boomed in the mid-2000s, USG posted year after year of higher sales and earnings—except in 2005, when it booked a $1.4 billion loss after setting aside funds for asbestos settlements under its bankruptcy reorganization. From 2001 to 2006, sales increased 75%, to peak at $5.8 billion, while net income tripled, to $288 million. But in 2007, as builders put down their nail guns, sales fell 10%, to $5.2 billion, with profit plunging to $76 million, below 2001's level. "This company seems to face challenges not infrequently," Foote observes. "It can be a wild ride at times."

The 57-year-old CEO handles the ups and downs with the emotional detachment of an economics professor. Dressed in shirtsleeves and a tie, he appears casual. He has little time for chitchat, however. Raised in suburban Milwaukee, Foote recalls duck hunting with his father in Canada. But the graduate of Williams College and Harvard Business School talks mostly about economic cycles, costs, and "value propositions."

In his 12 years as boss, Foote has invested heavily to modernize USG's manufacturing. In 2007 alone, the company spent $460 million on capital expenditures, or 9% of sales, a high ratio for any industrial outfit. Today, 70% of USG's capacity is less than nine years old. Its new machines can produce wallboard at 600 feet a minute, two to three times faster than old machines. And, as Foote points out, they require no more personnel. Foote has also been careful to scatter plants across the country, to reduce costs of shipping such heavy materials.

Value of Integration

USG has another edge: It is a fully integrated producer, from gypsum mines and quarries in the U.S. and Mexico to paper mills and its own distribution subsidiary, L&W Supply.

Despite its highly cyclical nature, institutional investors like USG stock. In addition to Berkshire Hathaway, which owns 17.2% of the company, Germany's Knauf International has a 14.9% stake. Third Avenue Management of New York joined in last year, buying a 5.6% interest when shares traded between $35 and nearly $58. Portfolio manager Ian Lapey concedes, "The housing downturn clearly has turned out to be deeper than we would have imagined." But he has no second thoughts about the purchase. "The wallboard business is generally a very good business on a long-term basis," he says.

Foote vows USG won't disappoint shareholders. He does confess to one wish, however—that the calendar had already advanced to 2010. "The future can't come soon enough."

Howard Wolinsky is a regular contributor to BW Chicago.