Seeking Alpha: Headwaters Outperforming Its Markets, With Flexibility To Do More

It looks as though 2015 is going to go into the books as another year where initial expectations for residential construction proved overly ambitious. That hasn't held back Headwaters (NYSE:HW) too much, though, as the shares have continued to perform pretty well. Since my last update in February, the company's shares have tacked on another 25% against a roughly 7% decline in the S&P 500. That performance also stacks up well against other infrastructure/construction plays, as Cemex's (NYSE:CX) shares have lost about 20% of their value over that time while Plum Creek (NYSE:PCL) has lost about 12% and Louisiana-Pacific (NYSE:LPX) has just squeaked out a small gain (all of which excludes dividends).

I don't think Headwaters is about to get any major boost from a construction tailwind, but I think the company remains well placed to exploit what growth there is in construction and remodeling by taking share with its roofing and stone-siding businesses and leveraging its market-leading siding accessories business. I also see further opportunities for the company to benefit from fly ash substitution in the cement business, and HW has more flexibility now to pursue incremental acquisitions.

Valuation has been a tricky issue for me with Headwaters in the past, and that's still the case today. I don't really see how the company's likely free cash flow streams can support the price, and it likewise seems that you have to go along with a pretty healthy EBITDA multiple to get that metric to work. I don't dismiss the possibility/potential of ongoing outperformance supporting higher targets, but it's hard to call these shares egregiously mispriced.

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Headwaters Outperforming Its Markets, With Flexibility To Do More