OID: "Happy"?!
    Nygren: Not really. But I'm willing to talk about it. People frequently ask me why I haven't added to a holding that's done poorly. Well, I don't like adding to our holdings in a stock when the business is performing poorly relative to our expectations. And USG is a good example right now.
    USG's asbestos liabilities have grown to a level that, quite frankly, has surprised us. And even though the stock's cheaper, I don't want to add to it - because the fundamentals aren't coming forth the way that I expected. On the other hand, the valuation is compelling.

OID: Then we're all ears.
    Nygren: USG is the largest manufacturer of gypsum wallboard in the world. And seven or eight years ago, it was the subject of a hostile takeover offer which they fought off by doing a leveraged recapitalization. However, as a result, they become heavily leveraged just as the building cycle turned down and were unable to service their enormous debt. So they declared bankruptcy, refinanced their debt, recapitalized with equity, basically, and came back out as a public company…

OID: Around 1993, it appears, based on Value Line.
    Nygren: That sounds about right. And during the ensuing seven years, they've done a very good job of modernizing their plants. In the process, they've increased their lead as the low-cost producer of gypsum wallboard. And they've paid off most of their debt. In fact, their net debt is now down to a few hundred million dollars. And they've utilized their excess cash flow to buy back stock. Clearly, those are all good things.
    And at the end of last year, I'd have told you that USG ought to be able to earn $3± per share at the trough of the economic cycle and $10± per share at the peak - with most of that difference largely the result of fluctuation in wallboard pricing.
    Well, they were very close to that peak a year ago when they earned $8 and change.

OID: Actually $8.66 according to Value Line.
    Nygren: And they've bought back some stock since. Plus, they've brought new, more efficient plants onstream. So in an environment in which they earned $8.66, I think that they'd earn about $10 today.
    Therefore, in an environment like the one in which they lost money before their last bankruptcy, because of their stronger balance sheet and lower cost structure, they'd have been on schedule to earn about $3 per share with wallboard prices at $70 per 1,000 square feet. By comparison, wallboard prices were around $155 per 1,000 feet last year. So an environment of $70 to $155 per 1,000 square feet would have gotten them earnings of $3 to $10 per share.