Jelly Roll Capital Equity Research

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Opportunity in Asbestos/Mesothelioma Litigation?

Buying into companies that are the subject of class-action lawsuits with enormous liability is always a risky proposition. Over the last few decades, attorneys have won millions of dollars from product liability lawsuits against drug makers, tobacco companies, and others. One of the latest ongoing class-action lawsuits involves a rare form of cancer called mesothelioma, which is closely linked to the inhalation of asbestos fibers. For most of the last century, asbestos was heavily used in building construction because of its excellent properties. One side effect that wasn’t known, however, was that continued exposure to asbestos fibers has a deleterious effect on one’s health, including the development of mesothelioma, which often takes decades to arise. In the 1980s, lawsuits became increasingly common, touching off a series of costly verdicts for companies that manufactured products using asbestos. Attorneys continue to aggressively pursue asbestos cases, as no general settlement has been reached yet.

I think the fear surrounding some of the companies with involvement in the mesothelioma/asbestos lawsuits is overblown. Many companies that were the target of lawsuits filed for bankruptcy in order to take advantage of the Section 524 provision, which allows companies that fund a settlement trust to limit exposure to future additional liabilities, in this case, from asbestos-related lawsuits.

One company that has successfully emerged from bankruptcy brought on by mesothelioma litigation with a sufficient trust is USG, the company that invented wallboard. After declaring Chapter 11 bankruptcy in 2001,  having sufficiently funded its asbestos settlements using an equity issue that gave Warren Buffett’s Berkshire Hathaway almost 20% of the outstanding stock at a price around $40/share. Although USG’s shares have been volatile of late, they are trading on the low end of the 52 week range and stand to benefit from an eventual rebound in housing. Although financial statements are heavily impacted for the time being by charges taken from mesothelioma and other asbestos litigation, the company’s core operations remain solid, and the current price is only moderately above where Buffett purchased the stock. There is obviously a large negative sentiment surrounding USG between the housing market fallout and the persistent threat of more asbestos-related lawsuits, but anyone willing to take a long-term outlook may benefit from the current fear.

Why do I think mesothelioma lawsuits present an opportunity for profit? In USG’s case, the liability has been accounted for and prepaid. Going forward, the company (and investors) can focus more on its profitable core operating business than on the effects of asbestos litigation.