USG Corporation (USG), Martin Marietta Materials, Inc. (MLM): Homebuilder Sentiment Surges Above Expectations

Definitely a growth stock

USG Corporation (NYSE:USG) is a leading manufacturer and distributor of building materials for both residential and non-residential construction, repair, and remodeling. The most important product is the Sheetrock brand gypsum drywall/joint compound. In April, the company reported first quarter 2013 net sales of $814 million, up 4% from last year’s Q1 net sales of $783 million. James S. Metcalf, Chairman, President, and CEO, said that improvement in all segments in the period resulted from executing the company’s “Plan to Win” and its commitment to innovation and lowering breakeven levels as the recovery continues in core markets.

Even though earnings surprises have been consistently negative in the past, I can see this stock bringing some positive ones in the future. Sales are expected to grow at almost 10% per year for the next two years. Much of this growth comes from residential remodeling and repair activities. Many homeowners have delayed selling their homes, waiting for a better real estate market. Consequently, an improved real estate market has encouraged many homeowners to remodel and repair their homes in preparation for sale. Additionally, new home sales have been trending upward and should help sales of drywall for new residential construction.

In terms of valuation, I believe that USG Corporation (NYSE:USG) is a good buy for the following reasons:

EPS growth is estimated to be more than 145% this year and 192.1% next year.

Warren Buffett’s Berkshire Hathaway is the largest shareholder of USG Corporation (NYSE:USG), with a 15.73% stake in the company.

USG Corporation (NYSE:USG) has a solid balance sheet with $494 million in cash.

S&P has a “Strong Buy” rating on the stock (5 out of 5 stars) and a 12-month price target of $40.00 per share.

Bottom line

In brief, demand for basic materials should increase, supported by household formation. This should help reverse the trend of homeowners turning into renters due to foreclosures and the credit crunch. An  environment of rising long-term rates can also mean more lending, and credit expansion has the effect of creating more demand for housing and driving GDP growth. The current pace of improvement in the labor market, together with historically low rates and homebuyers with equity to buy, will help these three construction stocks outperform the S&P 500 this year and in the years to come.

The article Homebuilder Sentiment Surges Above Expectations originally appeared on Fool.com and is written by Damian Illia.

Damian Illia has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Damian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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