A First for USG
The company shared detailed financial projections during its inaugural investor day, signaling management's confidence in its strategy.
USG’s (USG) investor day was a significant event for two reasons. First, USG had never before held a meeting like this, and second, management shared detailed midterm financial targets for key operating metrics, such as segment operating margins and consolidated free cash flow. Management’s willingness to share such detailed financial projections with the investment community was notable given that the firm has historically avoided providing such a comprehensive outlook to investors. We think this departure from prior disclosure practices signifies management’s confidence in USG’s business model, especially now that the firm has a healthy balance sheet and is embarking on meaningful cost-saving initiatives. After updating our valuation model, we increased our fair value estimate to $38 from $36 per share. The increase in our fair value estimate was due to our upward-revised segment operating margin assumptions and the time value of money since our last update.
Management expects the U.S. wallboard and surfaces segment to expand adjusted operating margin from 16% in 2017 to over 20% by 2020; U.S. performance materials is expected to achieve over a 10% adjusted operating margin by 2020 (versus 6.4% in 2017); and management believes that the U.S. ceilings business can top a 23% adjusted operating margin in 2020 (versus 19.3% in 2017). We thought management did a good job articulating the pathway to better profitability over the next three years, and our own calculations show that these targets are achievable if end market strength holds up. USG’s advanced manufacturing initiative, which aims to reduce costs through automation and other operational improvements is an important component of USG’s margin improvement plan. A $300 million investment ($250 million capitalized) is expected to result in $100 million of incremental run-rate EBITDA by the end of 2020. USG expects to generate over $450 million of free cash flow in 2020 versus $214 million in 2017.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Brian Bernard does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.