Headwaters, Inc. (HW) has had its stock severely beaten down, probably for good reason, because the business line that has provided 60% of profits basically shut down at the end of 2007. Residual profits from the discontinued alternative energy line will continue at a reduced rate in 2008, then cease. Ouch!
Besides the discontinuing alternative energy business, Headwaters next biggest line is construction materials. This business is tied to new home and commercial construction. We all know how that has been going. Double ouch!
The future, however, looks pretty positive for Headwaters (especially the stock price). HW is in several different business areas, some of which are related to others. The discontinued alternative energy business was related to coal, and the company has taken some of that expertise into new ventures. I will give a brief overview of each:
- Coal Combustion Products: Fly ash as a residual of coal combustion is processed and sold as an addition or substitute for Portland cement. The fly ash improves the quality of concrete and is used in some of the construction materials products. Sales of the products continue to grow in spite of the turn down in housing construction.
- Construction Materials: Accounting for almost half of its revenues, HW sells architectural stone, block, brick and stucco products. Sales have remained steady despite the downturn in home construction and remodeling. New product lines grew at a 22% rate for 2007 and an acquisition increased products and revenues.
- Coal Cleaning: HW has developed a process to clean coal waste to make it usable. This business should start providing revenue in 2008.
- HCAT Technology: The company has developed a process to transform residual, heavy bottom of the barrel oil into high value light oil. The technology is in the verification phase at several refineries. The market could be 500,000 barrels of oil per day with up to 80 cents profit per barrel processed. Definitely a growth area in the next few years.
- Other businesses: A hydrogen peroxide plant in Korea should start providing significant revenue and earnings with growth potential. An existing 50 million gallon ethanol plant should be more profitable in 2008. (I think ethanol producers will surprise with their profits for 2008).
So Headwaters is a company with some growth possibilities to replace the lost alternative energy profits. At a PE of 10 to 12 on 2008 projected earnings I think the stock is an excellent value at these levels.
Note: I currently do not have a position in HW. The stock was added to this blog’s 20 Stock Portfolio for the start of the year.