On Jan 9, 2015, Zacks Investment Research upgraded Headwaters Incorporated (HW) to a Zacks Rank #1 (Strong Buy).
Why the Upgrade?
Headwaters has not only witnessed a rise in its share price but also upward revision in its earnings estimates on account of recovery in the residential housing and R&R (repair and remodel) end markets, and a favorable EPA ruling.
Recently, the company’s share price scaled a 52-week high of $15.43 during intraday trading on Jan 2. Headwaters has delivered a robust YTD return of about 50.8%, outperforming the S&P 500 return of 14.6%.
With respect to earnings performance, this building products company has delivered positive surprises in the last four quarters with an average beat of 230%. Strong performance prompted the Zacks Consensus Estimate to increase about 6% to 52 cents per share for 2015 and 4% to 76 cents for 2016, over the last 60 days.
Headwaters’ fourth-quarter earnings came in at 37 cents per share, reflecting a 28% increase year over year on the back of improvements in the new residential construction market and product launches. Both the legacy business and acquisitions benefitted results in the quarter, as the 14% year-over-year revenue growth included a 10% contribution from acquisitions and 5% improvement in core legacy Light Building Products and Heavy Construction Materials segment.
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 the 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 is anticipated to 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 owing to 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 2015. While the exact amount to which cement prices will finally increase is uncertain, this is a positive signal for fly ash pricing.
The Environmental Protection Agency’s (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”) is a positive for the company. 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 to grow the beneficial use of coal ash, safely keeping the material out of disposal facilities, and create economic and environmental value.
Other Stocks to Consider
Currently, Headwaters carries a Zacks Rank #1 (Strong Buy). Some other stocks worth considering in the sector include USG Corp. (USG), Armstrong World Industries, Inc. (AWI) and Continental Building Products, Inc. (CBPX). While USG holds a Zacks Rank #1, Armstrong World and Continental Building Products carry a Zacks Rank #2 (Buy).
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