Buffett Reaps Gains as USG to Eagle Build on Housing Rally

Building-supply stocks such as USG Corp., in which Warren Buffett holds a 16 percent stake, and Eagle Materials Inc. that more than doubled last year are poised to rise further as the U.S. housing market extends its recovery.

“We’re in the early stages of what we think is a long-term, multiyear recovery in housing,” said Philip Orlando, chief equity market strategist at Federated Investors Inc. “You have a tremendous amount of catch-up that’s going to drive the next five or 10 years.”

USG, the drywall maker with Buffett’s Berkshire Hathaway Inc. as the biggest shareholder, and Eagle Materials continue to climb after surging in 2012 as homebuilding rebounded on pent-up demand and low mortgage rates. The December new-home sales rate may be the highest since April 2010, according to the median estimate of economists surveyed by Bloomberg ahead of a Commerce Department report tomorrow.

That continuing recovery, along with a remodeling market growing as unemployment drops, rebuilding from superstorm Sandy and rising prices for construction materials, will propel the stocks, said Orlando. His Pittsburgh-based firm owns USG, Eagle Materials, insulation maker Owens Corning and other housing-related shares such as Miami-based builder Lennar Corp.

Housing starts reached 780,000 last year, still only about half the annual average of 1.47 million since 1959, the earliest year for Commerce Department data, and a fraction of 2005’s 2.1 million. As they keep climbing from 2009’s low of 554,000, materials makers probably will have to boost production.

‘Ridiculously Strong’

Housing tipped the U.S. into its deepest recession in six decades at the end of 2007 after a building bubble fueled by risky mortgages burst. Contrary to what occurred in past economic recoveries, it has been one of the last industries to rebound. In 2012, companies such as Chicago-based USG and cement maker Texas Industries Inc. began to post operating profits after years of losses, boosting the shares.

“2012 was almost ridiculously strong, but it really hadn’t participated in the first 2 1/2 years of a bull market,” said Michael Shaoul, chairman and chief executive officer of Marketfield Asset Management LLC in New York, which owns shares of USG and Dallas-based Eagle Materials. “The upside leverage in that sector is significant.”

USG fell 0.8 percent to $29.35 at the close in New York and has gained 4.6 percent this year, compared with the Standard & Poor’s 500 Index’s 4.8 percent increase. Eagle Materials climbed 1.2 percent to $65.19 and has risen 11 percent for the year.

Buffett Stake

The value of Buffett’s USG stake of 17.1 million shares climbed to $479 million last year as the stock almost tripled to its highest year-end close since 2007.

Buffett predicted a housing recovery in 2011 and has long invested in housing-related companies. Berkshire has held USG shares since at least 2000 and is the biggest investor in Wells Fargo & Co., the largest U.S. home lender. Berkshire’s Acme Brick unit in 2011 bought Montgomery, Alabama-based Jenkins Brick Co.

Makers of wallboard, roofing shingles, insulation and door trim are cautious about increasing capacity even as signs point to a sustained recovery in homebuilding, said Mike Wood, an analyst at Macquarie Group Ltd. in New York. That’s because a predicted industry rebound had been slow to materialize since the 2009 low in housing starts.

“The pricing story is going to be the main area that helps drive stocks in 2013,” Wood said. “Even though capacity utilization is weak, it’s improving and that’s giving some producers pricing power.”

Higher Prices

USG’s third-quarter average price for wallboard rose 18 percent to $131.97 a thousand square feet from $111.66 a year earlier, the company said in an Oct. 18 earnings report. Wallboard producers have sent letters to customers discussing price increases of 25 percent this year, Robert Denk, a senior economist at the Washington-based National Association of Home Builders, said in a telephone interview.

Makers of plywood, roofing materials and insulation are all seeking to raise prices, Denk said. The cost of lumber and plywood climbed 11 percent in 2012 and insulation materials rose 5.1 percent, according to Associated General Contractors of America, an Arlington, Virginia-based trade group.

Homebuilders have difficulty resisting the increases because 80 percent of them produce fewer than 25 houses a year, while buying materials from a limited number of large makers, Denk said. Builders will step up their pace gradually to a sustainable level of 1.4 million starts a year, he said.

‘Upward Pressure’

“There will be upward pressure on material prices as the housing market recovery gains momentum,” Denk said.

With mortgage rates near a record low, there’s room for homebuilders to pass along rising material costs to buyers, Shaoul said. The average rate for a U.S. 30-year fixed mortgage was 3.47 percent as of Jan. 22, according to Bankrate.com data compiled by Bloomberg. That compares with an average of 5.59 percent during the housing boom period from 2003 through 2006.

Price increases and higher sales volumes are helping building-materials companies return to profit. Owens Corning, based in Toledo, Ohio, reported a third-quarter profit for its insulation unit that was the first in four years.

The cement unit of Dallas-based Texas Industries posted operating earnings of $6.1 million for its quarter ended Nov. 30, compared with a loss of $5.4 million a year earlier. USG had operating profit of $81 million for the first nine months last year after a loss of $163 million a year earlier.

Rising employment and low interest rates are also contributing to jump-start home repair and remodeling, which had been stalled since the recession, said Kathryn Thompson, a founder of Thompson Research Group in Nashville, Tennessee.

“Just as it was a multiyear downturn, this is going to be a multiyear uptick,” she said in a telephone interview.

Building-materials shares such as USG and Eagle Materials that more than doubled in 2012 won’t repeat those gains this year, though they “are still going to outperform” the S&P 500, said Orlando, the Federated Investors equity strategist.

“If you can get a stock that’s doing 20, 25 or 30 percent, you’re crushing it,” he said.