Headwaters Reorganization Continues On Track

| About: Headwaters Incorporated (HW)

Headwaters Inc. (NYSE:HW) released 3rd quarter earnings this morning and its reorganization and new business growth appear to be on track (Call Transcript). The company shut down its Section 45 renewable energy program on Dec 31, 2007 and has been entering some new business lines to replace the loss of the companies major revenue and profit generator.

Headwaters' secondary business of building products has also taken a serious hit with the decline in housing construction over the last 2-3 years. I became interested in the company when I learned how it is attempting to take its renewable fuel (coal gasification) expertise into new areas to rebuild the company’s revenues and profits.

Any comparison with 2007 results does not give a good picture of where the company is going since a significant portion of the 2007 business no longer exists. I will pull a few figures from Q2 2008 for comparison to Q3.

  • Total revenues: Q2: $172 million, Q3: $230 million, +33%
  • Net income: Q2: -$9.2 million, Q3: $13.7 million, loss to gain
  • Net per share: Q2: -22¢, Q3: 31¢, ditto

Things are definitely going in the right direction and meeting the company’s guidelines that it will earn 60¢-75¢ per share for 2008. At this time, Headwaters is generating revenues from 3 business areas with a couple of others in the development stage.

Building Products: Q3 revenues of $129.3 million, up from $93.6 million in Q2, but down 11% from Q3, 2007. Gains Q over Q due to seasonality and not a turn around from the current building slowdown. New products are performing well in spite of the slowdown and gross margin was 27.3%.

Coal Combustion Products: Fly ash is a strengthening additive for concrete and concrete building materials. Q3 revenues of $83.2 million, essentially the same as 2007, and compared to $61 million in Q2, which was also level with 2007. Extremely environmentally friendly fly ash sales are staying level in spite of construction down turn and should be a future growth engine.

Coal Cleaning: Q3 revenues of $13.1 million, up 111% from Q2. 358,000 tons of coal sold compared to 192,000 in Q2. Average price of $48 per ton up from $40 in Q2. Headwaters now has 8 facilities in various stages from start up to full operation and is on track to have at least 10 operating by the end of 2008.

The next revenue source to come on line will be a recently completed, joint venture, hydrogen peroxide facility in South Korea.  Headwaters is working on several other technologies, primarily in energy utilization, that could produce future revenue streams.

Headwaters appears to be on track to achieve the goals that prompted me to add them to this site’s Special Opportunities Portfolio in January 2008. The share price has dropped about 14% since then but has traded as high as $15 this year. I am looking for a share price in the $20s in the next couple of years.

Note: I have a long position in HW.

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