Shares of Headwaters Incorporated (HW) touched a 52-week high of $15.43 during intraday trading on Jan 2, finally closing at a lower price of $15.10.
The company has delivered a robust year-to-date return of about 52.7%, outperforming the S&P 500 return of 14.7%. Headwaters has a market cap of $1.11 billion. Average volume of shares traded over the last three months was approximately 529K.
What's Driving Headwaters?
Headwaters’ share price got a lift following the Environmental Protection Agency (EPA) declaration on Dec 19 that it will regulate coal ash disposal as a non-hazardous material under Subtitle D of the Resource Conservation and Recovery Act (“RCRA”). Headwaters had sued the EPA in 2012 to force the deadline for completing disposal regulations that were initially proposed in 2010 under RCRA. The lengthy regulatory process created uncertainty, hurting the beneficial use of coal combustion products.
Headwaters is a leading coal ash marketer aiming to increase the utilization of such valuable materials. The ruling provides regulatory certainty that will help the company grow the beneficial use of coal ash, safely keeping the material out of disposal facilities, and create economic and environmental value.
Share price of Headwaters has been trending upward since the company reported strong fourth-quarter results and an upbeat outlook on Nov 4. Earnings came in at 37 cents per share, reflecting a 28% increase year over year on improvements in the new residential construction market and product launches. Earnings beat the Zacks Consensus Estimate of 25 cents.
Both the legacy business and acquisitions drove Headwaters’ top and bottom lines in the fourth quarter, as the 14% year-over-year revenue growth included a 10% benefit from acquisitions and 5% improvement in core legacy Light Building Products and Heavy Construction Materials segment. Acquisitions were also accretive to cash flow and earnings. The company intends to continue pursuing acquisitions in the future.
Headwaters initiated adjusted EBITDA guidance in the range of $150–$165 million for fiscal 2015, representing growth between 9% and 20% over 2014 levels. The guidance assumes growth in single-family starts in the range of 10% to 15%, R&R growth in the low single digits, percentage growth for fly ash volumes in high single digits and net ash price increases in the 3% to 4% range.
Based on continued price and volume increases, the heavy construction materials segment is expected to break its adjusted EBITDA record set in 2007. The light building products segment is also expected to deliver growth in tandem with an increase in commercial and institutional construction demand. Adjusted EBITDA in architectural stone sales will improve driven by operating efficiencies. The roofing and siding groups are also expected to deliver revenue growth and improved margins.
Headwaters is witnessing $8 to $12 per ton increase in cement prices driven by additional cost due to new environmental regulations and current demand approaching capacity in certain markets. These increases are set to go into effect by the end of first-quarter calendar 2015. While the exact price to which cement will finally increase is uncertain, this is a positive signal for fly ash pricing.
Further, the estimates for Headwaters moved upward in the past 60 days. The Zacks Consensus Estimate increased about 6% to 52 cents per share for 2015 and 4% to 76 cents for 2016 in the said timeframe.
Other Stocks to Consider
Currently, Headwaters carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Armstrong World Industries, Inc. (AWI), Owens Corning (OC) and USG Corp. (USG). All the three stocks carry a Zacks Rank #2 (Buy).
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