Headwaters Under Water - But Not For Long

| About: Headwaters Incorporated (HW)

Headwaters Inc. (NYSE:HW) is an interesting company for those of us who hate waste. You see, HW is in alternative energy and construction materials businesses and whatever would go to waste in their alternative energy business gets used in their construction materials business! You know what else is great about HW? It is that they almost always beat analyst estimates and right now analysts are not predicting such a bright future for HW (current quarter results are not expected for another week). So the stock is trading at a P/E of 5, within 5% of its 5 year low, at a price to sales ratio of 0.5 and at more than a 30% discount to its book value.

Needless to say, construction materials business is out of favor these days, so it is not surprising that HW stock is in the rut. Another issue is negative sentiment in the US towards coal as an energy source. And perhaps most importantly, keeping the price of HW down is the fact that HW sells a reagent that is used to liquefy coal, which qualifies certain alternative energy producers for section 29(a) (redesignated to IRS Section 45J and IRS Section 45K). Well, this tax credit has a time limit and evaporates as the price of oil increases, so the demand for HW's reagent wanes as many of its customers are motivated mostly by this credit itself. On the other hand with light sweet crude trading at over $80 / barrel, liquefied coal becomes an increasingly competitive source of energy. Granted that coal-to-fuel plants will take a couple of years to materialize, but once they do, demand for the reagent will skyrocket and so will HW's profit. In the meantime, analysts are forecasting a lackluster 2008 for HW, with profits falling. Yet, even under the very worst assumptions, HW's profit will get chopped in half and at its current price HW is a real bargain!

Disclosure: Author has a long position in HW