NYSE : US$13.32
BUY Target: US$15.00
Headwaters Incorporated is a provider of innovative construction materials for use in the light building products and heavy construction industries
Sustainability — Energy & Power Technologies PUSHING FOR OUTPERFORMANCE; MAINTAIN BUY, $15 TARGET
Investment recommendation We expect improving construction market trends to help support P&L momentum. With a host of new products entering the builders channel in 2014, we look for improved operating leverage and cash generation. Investment highlights Progress on profitability and outperformance vs. the peer group is impressive, as light and heavy construction markets continue to improve off the sharp multi-year bottom. Management’s “midcycle” earnings power model ($195M EBITDA) appears doable to us.
Management stays picky, as $80M of accretive M+A is likely FTM, while underlying organic benefits (distribution penetration, ash pricing) continue to build. That said, Q2/14 weather was tough, driving us to tweak our model slightly, even with a couple important weeks of selling left. Full analyst day details below.
Given the weather, we adjust our Q2 rev/EPS estimates while keeping the full year intact at $791M/$0.60. Valuation We apply a multiple of 10.0x EV/FY2015 EBITDA (F2015E EBITDA $153M) to reach our $15.00 target.
Risks Volatility in residential construction markets, uncertain flyash regulations/demand and a highly leveraged balance sheet