Shares of Headwaters Incorporated HW attained a 52-week high of $18.50 on Apr 6, before closing at $18.22. The new high came on the back of benefits expected from acquisitions, upward pricing trends and improvement in the repair and remodel market.
The company has delivered a robust one-year return of about 46%, outperforming the S&P 500 return of 12.3%. Headwaters has a market cap of $1.34 billion. Average volume of shares traded over the last 3 months was approximately 730K.
Strengths of Headwaters
Shares of Headwaters started trending upward ever since the company reported upbeat first-quarter fiscal 2014 (ended Dec 31, 2013) results on Feb 3. Adjusted earnings improved 40% to 7 cents per share from 5 cents in the prior-year quarter on the back strong performance in core segments and all major product categories.
Headwaters’ shares further gained support on the announcement of its acquisition of Pennsylvania-based small fly ash marketer on Feb 19. The acquisition will augment the company’s high quality fly ash supply, improving its competitive position in the Northeast given the lack of the material in the region.
Headwaters witnessed growth in residential repair and remodel in the first quarter. Products with major exposure to repair and remodel enjoyed mid-single digit organic growth, which bodes well for 2015 in this end market.
Further, the Architecture Billings Index (ABI) score was 50.4 for February, up from a mark of 49.9 in January. An ABI Index score above 50 implies increase in billings. This suggests that the nonresidential market continues to improve, albeit at a modest pace.
Headwaters’ construction material segment volume increased in the first quarter and experienced strong demand and stable supply. The increase in volume was driven by increases along the Gulf Coast and the Eastern part of the U.S. During the quarter, the company implemented price increases in multiple markets and believes that the upward pricing trends will continue. Although Headwaters usually implements price increases in the March quarter, the company implemented some increases in several markets during the December quarter and anticipates additional price increases during the March and June quarters which will drive growth.
On Mar 6, Headwaters announced highlights from its business strategy at the 13th Annual Analyst and Investor Day held in New York City. The company will continue to pursue its objective of growing revenues while maintaining strong margins.
To achieve this, the company will follow a four pronged strategy — expand product sales to core customers; provide a total experience solution; leverage its established sales and marketing coverage; while continuously standardizing improving and leveraging its common infrastructure. End-use demand for Headwaters’ products remains strong across its businesses.
On Mar 24, Headwaters entered into a new seven-year $425 million senior secured term loan B facility (Term Loan) which will mature in Mar 2022. This combined with the company’s decision to repurchase its 8.75% convertible notes in February will reduce its annual cash interest expense run rate to approximately $31 million from an annual run rate of approximately $47 million at the end of 2014.
Headwaters is well positioned to benefit from the strong performance of its light building products and heavy construction materials segments. A significant contribution from margins, together with growing demand, will help the company to generate adequate cash, thereby facilitating debt reduction and enhanced returns to investors.
Other Stocks to Consider
Currently, Headwaters carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Quanex Building Products Corp. NX, Trex Co. Inc. TREX and Aspen Aerogels, Inc. ASPN. While Quanex and Trex sport a Zacks Rank #1 (Strong Buy), Aspen Aerogels carries a Zacks Rank #2 (Buy).
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