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So I watched the Red Sox this weekend and I was all faceful that they couldn’t get the job done at Yankee Stadium. Oh well, what else is new? So in order to cheer myself up, I went to the gym and started slapping 45 lb plates onto the barbell until it started to bend like the branch on a willow tree. After doing hundreds of reps til I was pumped up like a lizard, I went home and chugged gallons of Nitro-Tech so that my shredded muscles would grow to dimensions not yet quantifiable by the common man.
Now this is all a good story, but the bad news is when it’s time to get rid of the Nitro-Tech from my body, sometimes I feel like I am a mason manufacturing cinderblocks. Now these cinderblocks aren’t the ordinary cinderblocks made of Portland cement. These are the new improved cinderblocks that have fly ash added to them. When coal is burned in
today’s modern electric generating plants, combustion temperatures reach approximately 2800 degrees F. The non-combustible minerals that naturally occur in coals form bottom ash and fly ash. Fly ash is a powdery material consisting of micro-sized, spherical, glassy particles. Fly ash concrete was first used in the U.S. in 1929 for the Hoover Dam, where engineers found that it allowed for less total cement. The spherical shape of the particles reduces internal friction thereby increasing the concrete's consistency and mobility, permitting longer pumping distances. Improved workability means less water is needed, resulting in less segregation of the mixture. Although fly ash cement itself is less dense than Portland cement, the produced concrete is denser and results in a smoother surface with sharper detail.
Fly ash reacts with lime that is produced by the hydration of cement, creating more of the durable binder that holds concrete together. As a result, concrete made with fly ash is stronger and more durable than traditional concrete made exclusively with portland cement. Concrete made with fly ash exhibits improved workability, decreased permeability, and better resistance to sulfate and alkali-silica reaction attack. This is kind of what happens in my large intestine. Look how pretty fly ash is:
Today I bought Headwaters, Inc. (HDWR) at 29.60. I will sell it in 4 to 6 weeks at 34.27. Here is why I like HDWR:
HDWR stock is up over 107% in the last 12 months yet it has a humble PE of 16.1. The price momentum, not withstanding this low PE, is really remarkable:
Headwaters runs three distinct business operations: Alternative energy, coal combustion products, and materials products.
*Alternative Energy
Creates coal-based synthetic fuels and catalysts to convert common fuel sources into more environmentally friendly alternatives. Alternative energy will be a growth industry for the next decade.
*Coal Combustion Products
Business primarily sells fly ash for use in concrete.
*Construction Materials
Produces and markets concrete, stucco, mortar, and block products. Headwaters sells fly ash to commercial builders that use it to make concrete stronger and more durable
Headwaters develops and commercializes technologies that it believes enhance the value of coal, gas, oil, and other natural resources. The company believes it is the largest provider of technologies used to produce coal-based solid synthetic fuels, and the industry leader in managing and marketing coal combustion products (CCPs) in the U.S. HDWR is developing and commercializing proprietary technologies to convert or upgrade fossil fuels into higher-value products and is developing nanocatalyst technologies that have multiple applications. The Company has experienced dramatic growth over the last several years, generated from internal growth as well as through acquisitions. Revenues have grown from $6.7 million in 1999 to $387.6 million for the fiscal year ended September 30, 2003.
Headwaters, Inc. uses its patented binding process to turn coal derivatives into synthetic fuel briquettes. These are even better than the briquettes found in the locker room commode at my gym. Formerly known as Covol Technologies, the company licenses its technology to operators and supplies the binding reagents. There are 28 third-party facilities (like utilities and coal companies) licensed to use Headwaters' technology. Headwaters’ licensees have ramped up production of solid synthetic fuel over the past five years. In 1998 production was only three hundred thousand tons. By 2003, production had grown to 38.2 million tons. For the first six months of fiscal 2004, Headwaters’ licensees have sold 20.0 million tons of solid synthetic fuel. The Company receives a royalty on the tons of solid synthetic fuel sold by licensees, providing Headwaters with a growing source of revenues. This means the Headwater guys come to work and all these royalty checks come in the mail. The checks pile up on their desks and fall on the floor. The Headware guys can look at porn on the internet and the checks keep coming in. As these 3rd party companies produce more synfuel, they send more checks. Headware employees can be playing golf, and they keep getting more checks. Life is good.
The coal derivative we are talking about is fly ash. People like to mix into into concrete. Fly ash is cheaper and more environmentally friendly than the portland cement used in current concrete mixes. Fly ash is getting more and more market share. Some states have passed legislation mandating an increase in the use of fly ash in construction work. The Environmental Protection Agency has published federal guidelines to encourage the use of fly ash in all federally funded projects. Fly ash use is also supported by the Federal Highway Administration, Department of Energy, Bureau of Reclamation, Army Corps of Engineers, and other agencies. Many states also recommend or require use of fly ash in state-funded projects. Fly ash use is allowed in every state.
So not only does it make a better product, Johnny Law is making you use it. This bodes well for rate of consumption increases. Also, the recovering economy will help tremendously, as historically cement sales have been highly correlated with the over GDP. If all the fly ash generated each year were used in producing concrete, the reduction in CO2 emissions would be equal to eliminating 25 percent of the world’s vehicles. Let’s all hold hands and sing kum-bye-ya. Save the whales, clean air for me to blow my fat cigar smoke into. There is a continual pressure on regulatory bodies to provide incentives for the production of environmentally friendly alternative fuel sources. This trend benefits HDWR, as does the trend towards the environmental responsibility of corporations.
So now that I’ve established that fly ash is good stuff, what makes Headwater better at it than the rest of the planet? Good question. Headwaters has the only national distribution system for high quality fly ash. The Company has strategically placed terminals and storage facilities in locations that give Headwaters the only national presence among participants in the fly ash industry. Second, Headwaters has long-term, exclusive agreements to manage the post-combustion operations of more than 110 coal-based generating units, giving the Company the contractual rights to much of the high quality fly ash produced in the U.S. Finally, Headwaters has diligently worked on new technologies that add value to the back end of the coal value chain.
So, in summary:
HDWR benefits from the success of several innovations, and from several unique business advantages:
• Economies of scale
• Proprietary technology
• Economies independent of scale
On April 21, 2004, Headwaters announced that it agreed to acquire Eldorado Stone, LLC. Eldorado is a leading manufacturer and marketer of premium quality architectural stone. Headwaters plans to incorporate fly ash in Eldorado’s products and integrate Eldorado’s extensive national sales and distribution system with the company’s compatible mortar and stucco products.
The proof is in the pudding. While the huge revenue growth can be attributable to some healthy acquisitions, going forward analysts are looking for growth of 20% in revenues per year and 15% in earnings per year. During fiscal 2003, Headwaters was able to achieve record results and impressive growth. The Company announced record revenues of $387.6 million, an increase of 225% over total revenue of $119.3 million for fiscal 2002. Net income increased 51% to $36.6 million, compared to $24.3 million in 2002. The Company’s reported earnings per diluted share for fiscal 2003 was $1.30, an increase of 38% over fiscal 2002 Total revenue for the June 2004 quarter was $134.3 million, up 26% from $106.4 million reported in the June 2003 quarter. Operating income increased 28% to $27.8 million from $21.8 million for the June 2003 quarter. Net income increased to $16.1 million or $0.47 per diluted share, compared with $10.5 million or $0.37 per diluted share in the prior year's third quarter.
Total revenue for the nine months ended June 30, 2004 was $355.3 million, up 26% from $281.2 million reported for the nine months ended June 30, 2003. Operating income increased 56% to $87.9 million from $56.5 million for the nine months ended June 30, 2003. Net income for the nine months ended June 30, 2004 increased to $44.8 million or $1.38 per diluted share, compared with $25.4 million or $0.90 per diluted share for the nine months ended June 30, 2003. Management has adopted a policy of acquiring companies that provide earnings accretion, diversification, and strategic benefits. So far, the company has executed this policy well, and P/E multiples have not contracted.
Primarily due to Headwaters’ licensing and chemical sales business model, the Company delivered an attractive operating margin of 32% for fiscal 2003. Return on shareholder's equity, a stat you can’t really obscure with fly ash, is a smokin 30%. HDWR has gross margins of 38.31%, and operating margins of 23.61%, much higher than the industry averages of 22.57% and 8.08%.
The company also has other revenue sources such as synfuel production. Synfuel credits offer billions of dollars in tax savings to electric utilities. As energy prices have risen, and not shown and signs of falling back to where they once were synfuels make more economic sense. Congress has indicated it wants to see the nation decrease its dependence on foreign oil from 57% to 50%, he said. We don't have an energy source that's plentiful enough to do that unless you look at coal. Synthetic fuels make up just a fraction of the energy market, but the sector will grow quickly as the nation looks for alternatives to oil and natural gas.
The Company has an Advanced Direct Coal Liquefaction Technology that Produces Ultra-clean Transportation Fuels Directly from Coal. This is a process that uses coal as a starting point and is able to change coal molecules into diesel, gasoline or other fuel molecules. Nearly all of the sulfur, nitrogen, and other impurities are removed from the fossil fuel in the process, resulting in very high-grade liquid fuel. The Company entered into an agreement in June of 2002 with Shenhua Group, China’s largest coal company. China is interested in synthetic oil because it's coal-rich and oil-poor said. The agreement covered the use of Headwaters’ direct coal liquefaction technology in the first of three trains that would eventually convert 12,800 tons per day of coal into 50,000 barrels per day of gasoline and diesel fuel. In September of 2003, a second technology transfer agreement was signed allowing Shenhua to make some process modifications to Headwaters’ technology. In this agreement Shenhua agreed to pay the full license fee for the initial train. The payment amount totaled several million dollars. Shenhua is building the world's first coal-to-diesel fuel liquefaction plant. This is China we are talking about. The China of a potentially exploding economy. Management expects to be able to generate sufficient free cash flow to finance Headwaters’ current solid alternative fuel business while continuing to fund, new strategic acquisitions. Headwaters also looks to ink similar deals in India.
So what does all of this have to do with HDWR’s stock price? ANAL-yst EPS estimates have risen significantly during the past several months. For the current quarter, estimates have risen from .50 to .54 (8%) during the past 90 days. For FY 2004, estimates have risen from 1.58 to 1.65 (4.4%). Similarly, estimates have risen by .20 to 2.04 from 1.84 during the past 90 days (10.8%). Heck, even if the ANAL-ysts are correct, the $2.04 earnings times the PE of 16.1 gets you to a share price of $32.84 which is very close to my sale target.
Increasing ANAL-yst estimates are a good signal for future stock price appreciation.
HDWR carries 38 million in cash, and 50 million in debt. They are cash flow positive (free cash flow of 9.83 million). Earnings are relatively stable, putting HDWR is in a financially stable position. The company may leverage its current capital structure by adding further debt for use in acquisitions, which have proven to be accretive to earnings.
Here’s what the boss, Captain Kirk, said:
"The improvement in the economy is having a direct impact on our post-combustion businesses. It is highly likely that we will set a new record for fly ash shipments during 2004 as we continue to increase awareness of the value added nature of fly ash in concrete. Our acquisitions are performing as expected, resulting in increased earnings and cash flow," said Kirk A. Benson, Chairman and Chief Executive Officer.
Kirk will not need Spock and he will have no trouble with Tribbles. As HDWR stock approaches its zenith, he will not be forced to pitch margarine on TV.
Now this is all a good story, but the bad news is when it’s time to get rid of the Nitro-Tech from my body, sometimes I feel like I am a mason manufacturing cinderblocks. Now these cinderblocks aren’t the ordinary cinderblocks made of Portland cement. These are the new improved cinderblocks that have fly ash added to them. When coal is burned in
today’s modern electric generating plants, combustion temperatures reach approximately 2800 degrees F. The non-combustible minerals that naturally occur in coals form bottom ash and fly ash. Fly ash is a powdery material consisting of micro-sized, spherical, glassy particles. Fly ash concrete was first used in the U.S. in 1929 for the Hoover Dam, where engineers found that it allowed for less total cement. The spherical shape of the particles reduces internal friction thereby increasing the concrete's consistency and mobility, permitting longer pumping distances. Improved workability means less water is needed, resulting in less segregation of the mixture. Although fly ash cement itself is less dense than Portland cement, the produced concrete is denser and results in a smoother surface with sharper detail.
Fly ash reacts with lime that is produced by the hydration of cement, creating more of the durable binder that holds concrete together. As a result, concrete made with fly ash is stronger and more durable than traditional concrete made exclusively with portland cement. Concrete made with fly ash exhibits improved workability, decreased permeability, and better resistance to sulfate and alkali-silica reaction attack. This is kind of what happens in my large intestine. Look how pretty fly ash is:
Today I bought Headwaters, Inc. (HDWR) at 29.60. I will sell it in 4 to 6 weeks at 34.27. Here is why I like HDWR:
HDWR stock is up over 107% in the last 12 months yet it has a humble PE of 16.1. The price momentum, not withstanding this low PE, is really remarkable:
Headwaters runs three distinct business operations: Alternative energy, coal combustion products, and materials products.
*Alternative Energy
Creates coal-based synthetic fuels and catalysts to convert common fuel sources into more environmentally friendly alternatives. Alternative energy will be a growth industry for the next decade.
*Coal Combustion Products
Business primarily sells fly ash for use in concrete.
*Construction Materials
Produces and markets concrete, stucco, mortar, and block products. Headwaters sells fly ash to commercial builders that use it to make concrete stronger and more durable
Headwaters develops and commercializes technologies that it believes enhance the value of coal, gas, oil, and other natural resources. The company believes it is the largest provider of technologies used to produce coal-based solid synthetic fuels, and the industry leader in managing and marketing coal combustion products (CCPs) in the U.S. HDWR is developing and commercializing proprietary technologies to convert or upgrade fossil fuels into higher-value products and is developing nanocatalyst technologies that have multiple applications. The Company has experienced dramatic growth over the last several years, generated from internal growth as well as through acquisitions. Revenues have grown from $6.7 million in 1999 to $387.6 million for the fiscal year ended September 30, 2003.
Headwaters, Inc. uses its patented binding process to turn coal derivatives into synthetic fuel briquettes. These are even better than the briquettes found in the locker room commode at my gym. Formerly known as Covol Technologies, the company licenses its technology to operators and supplies the binding reagents. There are 28 third-party facilities (like utilities and coal companies) licensed to use Headwaters' technology. Headwaters’ licensees have ramped up production of solid synthetic fuel over the past five years. In 1998 production was only three hundred thousand tons. By 2003, production had grown to 38.2 million tons. For the first six months of fiscal 2004, Headwaters’ licensees have sold 20.0 million tons of solid synthetic fuel. The Company receives a royalty on the tons of solid synthetic fuel sold by licensees, providing Headwaters with a growing source of revenues. This means the Headwater guys come to work and all these royalty checks come in the mail. The checks pile up on their desks and fall on the floor. The Headware guys can look at porn on the internet and the checks keep coming in. As these 3rd party companies produce more synfuel, they send more checks. Headware employees can be playing golf, and they keep getting more checks. Life is good.
The coal derivative we are talking about is fly ash. People like to mix into into concrete. Fly ash is cheaper and more environmentally friendly than the portland cement used in current concrete mixes. Fly ash is getting more and more market share. Some states have passed legislation mandating an increase in the use of fly ash in construction work. The Environmental Protection Agency has published federal guidelines to encourage the use of fly ash in all federally funded projects. Fly ash use is also supported by the Federal Highway Administration, Department of Energy, Bureau of Reclamation, Army Corps of Engineers, and other agencies. Many states also recommend or require use of fly ash in state-funded projects. Fly ash use is allowed in every state.
So not only does it make a better product, Johnny Law is making you use it. This bodes well for rate of consumption increases. Also, the recovering economy will help tremendously, as historically cement sales have been highly correlated with the over GDP. If all the fly ash generated each year were used in producing concrete, the reduction in CO2 emissions would be equal to eliminating 25 percent of the world’s vehicles. Let’s all hold hands and sing kum-bye-ya. Save the whales, clean air for me to blow my fat cigar smoke into. There is a continual pressure on regulatory bodies to provide incentives for the production of environmentally friendly alternative fuel sources. This trend benefits HDWR, as does the trend towards the environmental responsibility of corporations.
So now that I’ve established that fly ash is good stuff, what makes Headwater better at it than the rest of the planet? Good question. Headwaters has the only national distribution system for high quality fly ash. The Company has strategically placed terminals and storage facilities in locations that give Headwaters the only national presence among participants in the fly ash industry. Second, Headwaters has long-term, exclusive agreements to manage the post-combustion operations of more than 110 coal-based generating units, giving the Company the contractual rights to much of the high quality fly ash produced in the U.S. Finally, Headwaters has diligently worked on new technologies that add value to the back end of the coal value chain.
So, in summary:
HDWR benefits from the success of several innovations, and from several unique business advantages:
• Economies of scale
• Proprietary technology
• Economies independent of scale
On April 21, 2004, Headwaters announced that it agreed to acquire Eldorado Stone, LLC. Eldorado is a leading manufacturer and marketer of premium quality architectural stone. Headwaters plans to incorporate fly ash in Eldorado’s products and integrate Eldorado’s extensive national sales and distribution system with the company’s compatible mortar and stucco products.
The proof is in the pudding. While the huge revenue growth can be attributable to some healthy acquisitions, going forward analysts are looking for growth of 20% in revenues per year and 15% in earnings per year. During fiscal 2003, Headwaters was able to achieve record results and impressive growth. The Company announced record revenues of $387.6 million, an increase of 225% over total revenue of $119.3 million for fiscal 2002. Net income increased 51% to $36.6 million, compared to $24.3 million in 2002. The Company’s reported earnings per diluted share for fiscal 2003 was $1.30, an increase of 38% over fiscal 2002 Total revenue for the June 2004 quarter was $134.3 million, up 26% from $106.4 million reported in the June 2003 quarter. Operating income increased 28% to $27.8 million from $21.8 million for the June 2003 quarter. Net income increased to $16.1 million or $0.47 per diluted share, compared with $10.5 million or $0.37 per diluted share in the prior year's third quarter.
Total revenue for the nine months ended June 30, 2004 was $355.3 million, up 26% from $281.2 million reported for the nine months ended June 30, 2003. Operating income increased 56% to $87.9 million from $56.5 million for the nine months ended June 30, 2003. Net income for the nine months ended June 30, 2004 increased to $44.8 million or $1.38 per diluted share, compared with $25.4 million or $0.90 per diluted share for the nine months ended June 30, 2003. Management has adopted a policy of acquiring companies that provide earnings accretion, diversification, and strategic benefits. So far, the company has executed this policy well, and P/E multiples have not contracted.
Primarily due to Headwaters’ licensing and chemical sales business model, the Company delivered an attractive operating margin of 32% for fiscal 2003. Return on shareholder's equity, a stat you can’t really obscure with fly ash, is a smokin 30%. HDWR has gross margins of 38.31%, and operating margins of 23.61%, much higher than the industry averages of 22.57% and 8.08%.
The company also has other revenue sources such as synfuel production. Synfuel credits offer billions of dollars in tax savings to electric utilities. As energy prices have risen, and not shown and signs of falling back to where they once were synfuels make more economic sense. Congress has indicated it wants to see the nation decrease its dependence on foreign oil from 57% to 50%, he said. We don't have an energy source that's plentiful enough to do that unless you look at coal. Synthetic fuels make up just a fraction of the energy market, but the sector will grow quickly as the nation looks for alternatives to oil and natural gas.
The Company has an Advanced Direct Coal Liquefaction Technology that Produces Ultra-clean Transportation Fuels Directly from Coal. This is a process that uses coal as a starting point and is able to change coal molecules into diesel, gasoline or other fuel molecules. Nearly all of the sulfur, nitrogen, and other impurities are removed from the fossil fuel in the process, resulting in very high-grade liquid fuel. The Company entered into an agreement in June of 2002 with Shenhua Group, China’s largest coal company. China is interested in synthetic oil because it's coal-rich and oil-poor said. The agreement covered the use of Headwaters’ direct coal liquefaction technology in the first of three trains that would eventually convert 12,800 tons per day of coal into 50,000 barrels per day of gasoline and diesel fuel. In September of 2003, a second technology transfer agreement was signed allowing Shenhua to make some process modifications to Headwaters’ technology. In this agreement Shenhua agreed to pay the full license fee for the initial train. The payment amount totaled several million dollars. Shenhua is building the world's first coal-to-diesel fuel liquefaction plant. This is China we are talking about. The China of a potentially exploding economy. Management expects to be able to generate sufficient free cash flow to finance Headwaters’ current solid alternative fuel business while continuing to fund, new strategic acquisitions. Headwaters also looks to ink similar deals in India.
So what does all of this have to do with HDWR’s stock price? ANAL-yst EPS estimates have risen significantly during the past several months. For the current quarter, estimates have risen from .50 to .54 (8%) during the past 90 days. For FY 2004, estimates have risen from 1.58 to 1.65 (4.4%). Similarly, estimates have risen by .20 to 2.04 from 1.84 during the past 90 days (10.8%). Heck, even if the ANAL-ysts are correct, the $2.04 earnings times the PE of 16.1 gets you to a share price of $32.84 which is very close to my sale target.
Increasing ANAL-yst estimates are a good signal for future stock price appreciation.
HDWR carries 38 million in cash, and 50 million in debt. They are cash flow positive (free cash flow of 9.83 million). Earnings are relatively stable, putting HDWR is in a financially stable position. The company may leverage its current capital structure by adding further debt for use in acquisitions, which have proven to be accretive to earnings.
Here’s what the boss, Captain Kirk, said:
"The improvement in the economy is having a direct impact on our post-combustion businesses. It is highly likely that we will set a new record for fly ash shipments during 2004 as we continue to increase awareness of the value added nature of fly ash in concrete. Our acquisitions are performing as expected, resulting in increased earnings and cash flow," said Kirk A. Benson, Chairman and Chief Executive Officer.
Kirk will not need Spock and he will have no trouble with Tribbles. As HDWR stock approaches its zenith, he will not be forced to pitch margarine on TV.
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