Headwaters Gains On Fly Ash, Building Products Demand

Building supplier Headwaters didn’t look much like its old and energized self as it emerged from the housing and economic downturn a few years ago.

In fact, it had sold off most of its legacy energy-related businesses, including a coal-sourced synthetic fuel business.

Also out: taking catalyst technology to China for converting coal into low-sulfur diesel.

Now only a tiny fraction of the firm’s energy-focused technology is left, and Headwaters (NYSE:HW) may sell that off, too.

“We’re left with fly ash and building products,” said CEO Kirk Benson in a phone interview with IBD.

Fly ash is the fine ash that flies up when coal is burned, but can be captured before it leaves the smokestack; it’s used as a replacement material for portland cement, a basic ingredient used in concrete.

Headwaters hauls it away and sells it to ready-mix cement contractors such as Martin Marietta (NYSE:MLM), Lafarge and Cemex (NYSE:CX).

“We think fly ash will continue to grow because it’s cheaper and you get a better concrete product,” Benson said.

Construction Demand Lifts

Both of the firm’s two surviving business segments have made a lot of headway the past few years as new-home starts picked up, the repair and remodeling market slowly improved, and commercial construction got its legs back.

Headwaters’ business had bottomed in 2011 as the housing crisis and Great Recession took their toll. That year, revenue had fallen in half from its peak in 2007 to under $ 600 million.

Revenue has since grown more than 10% annually on average. In 2015’s second fiscal quarter, which ended March 31, it jumped 15% from a year earlier to $ 180 million.

Benson says that he’s most excited about fly ash, due to increased demand at a time when limited domestic production capacity has led to cement shortages.

John Quealy, an analyst with Canaccord Genuity, calls Headwaters “the market leader in alternative portland cement.”

‘Northeast, California, Florida’

Headwaters’ fly-ash business, he says, has “rebounded strongly” in the last three to four quarters on strong demand and higher prices.

“A lot of it is used in nonresidential applications,” Quealy said. “There’s strong demand in the Northeast, California, Florida.”

Fly ash, which is used in everything from roads and bridges to large office and apartment buildings, accounts for about 40% of Headwaters’ revenue. The firm’s chief rival is Eagle Materials (NYSE:EXP).

Benson noted in the last quarterly report that 2015 fly ash volumes were on track to set “an annual growth record.” He expected a “continuing positive pricing environment.”


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