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Headwaters (NYSE:HW) is a probably good company. It probably has great products and I am also sure great people. However, there is one problem, this company can't make any money. Granted that to a great extent, this probably has to do with the weak housing market over the past several years, however, even in the best of times, Headwaters was still not making money.

The chart below shows the earnings per share of Headwaters for the past 10 years. As you can see, even in the middle of the housing boom, it still made no money.

HW Earnings Per Share Chart
(Click to enlarge)

HW Earnings Per Share data by YCharts

The company also has no book value. According to their latest balance sheet, they have about 1.268 million in shareholders equity. Also as evidenced by the chart below, stockholders equity has been in steady decline. More than likely, in their next quarterly filling, they will probably have negative equity.

HW Book Value Chart
(Click to enlarge)

HW Book Value data by YCharts

When a company loses money for a considerable length of time, it probably means that it makes up for the loses selling stock. That means considerable dilution to current shareholders and in the absence of very strong growth, the stock will probably go down. I think this is the case with Headwaters.


(Click to enlarge)

As evidence of this, the next chart shows us the total outstanding shares:

HW Shares Outstanding Chart
(Click to enlarge)

HW Shares Outstanding data by YCharts

The company has been able top survive by selling stock all these years. Around February of 2005, they netted as much as $173 million in a secondary stock offering as reported by marketwatch:

Headwaters to net $173M in secondary stock offering

WASHINGTON (MarketWatch) Headwaters Inc. said it's priced a secondary offering of 6 million common shares at $30.50 each. The natural resources company anticipates generating $172.95 million in net proceeds via the offering, with the funds to be used to repay borrowings and prepayment charges associated with its senior secured credit facilities. The public offering is expected to close March 1. Shares of Headwaters slipped 36 cents, or 1.2 percent, to end at $30.73 in Wednesday's trading.

Also as evidenced from their 8-K filling dated September 17, 2009, the company entered into agreement with a placement agent to sell 9.6 million shares to selected group of qualified investors, for total gross proceeds of about $37.4 million.

On September 17, 2009, Headwaters Incorporated ("Headwaters") entered into a placement agency agreement with Canaccord Adams Inc., acting as lead placement agent, and Stephens Inc. and Avondale Partners, LLC, acting as co-placement agents (the "Placement Agents") relating to the issuance and sale of 9. million shares of Headwaters' common stock in a registered direct offering at a price of $3.90 per share. Headwaters will raise gross proceeds of approximately $37.4 million from the offering. Pursuant to the terms of the placement agency agreement, Headwaters has agreed to pay the Placement Agents an aggregate fee equal to 6% of the gross proceeds from the offering. The sale of the common stock is being made pursuant to a subscription agreement between Headwaters and each of the investors in the offering. The transaction is expected to close on September 22, 2009 subject to customary closing conditions. A copy of the placement agency agreement and the form of subscription agreement being entered into with investors are attached as Exhibits 1.1 and 99.1 hereto, respectively, and are incorporated herein by reference.

I have not investigated the other spikes in the increase of outstanding shares, but I bet there are other offerings besides these two that I came across.

I don't have a beef with management nor with the company. But I have seen companies like Headwaters over and over again. Companies that just can't make any money and sell stock every once in a while to survive.

Sometimes the problem is in the product mix, sometimes management just can't get its act together and other times it's simply the sector. Whatever the reason, there are many companies out there that simply can't make money under any conditions.

Granted that past failure to make money does not mean that the company will not make money in the future, but so far, it is not making money.

Yes the company is probably performing better than last year, but that is simply not enough. The balance sheet has issues and my guess is that the company will issue additional shares to stay solvent.

The stock has performed fairly well over the past year, but this probably has to do more that it was trading at very depressed levels than anything else. Also, more than likely the stock has followed the price action of many housing stocks like PulteGroup (NYSE:PHM), Lennar (NYSE:LEN) and DR Horton (NYSE:DHI).

Personally I don't believe much in the housing recovery, but if you do, playing wound with housing stocks is probably a better choice than Headwaters.

I mean, if there are any dog ETF's out there, they are in the materials space. The Shares Dow Jones US Basic Materials (NYSEARCA:IYM) and the Materials Select Sector SPDR (NYSEARCA:XLB) have done nothing for the past 2 years or so.

Bottom line: I would not characterize Headwaters a turn around situation play, until such time comes, that I am convinced that its balance sheet is in better condition and, that it will not issue any more stock. I am still convinced of neither.

Source: Why Headwaters Is Not A Turnaround Situation Play