Seeking Alpha: Headwaters Doing Better Than Its Stock

The general idea of investing, at least for the value/GARP crowd, is to find those stocks where the underlying performance of the company is better than the performance of the share price and avoid those where the opposite is true. I thought Headwaters (NYSE:HW) was getting a little expensive back in September, but the roughly 25% drop in the share price since then has me thinking that the market may have flipped on it to a point where the business is being underrated and undervalued.

Although the shares still don't quite work for me on a DCF basis (my fair value is closer to $15), I am willing at times to go with other valuation approaches like EV/EBITDA, and particularly when I think there are meaningful tailwinds that can help a business. I like Headwaters' leverage to what should be an improving construction market in 2016 and this may be a good time to start taking a closer look at this consolidator in building materials.

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Headwaters Doing Better Than Its Stock

Seeking Alpha: Headwaters Doing Well In An Improving Market

I have not been the biggest fan of Headwaters' (HW) twin strategies of growth-by-acquisition and acquisitions-funded-by-debt, but the reality is that this company is doing a pretty good job of growing at a time when many housing-leveraged materials companies have yet to really catch their stride. Better still, there's a chance that the company's architectural stone siding products could grow from rounding error in the overall U.S. siding market to a significant business, a move that would have significant implications for the company's revenue and profits.

Certainly there is a difference between what can happen and what will happen. I nevertheless lean positive on this company, as the housing recovery is still in its early years and just 1% share of the U.S. siding market could mean a 15% shift in revenue from FY2013's base.

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Headwaters Doing Well In An Improving Market

Seeking Alpha: Wall Street Wants To Like Headwaters, But Should You?

I think everybody has a relative that won't ever let you get past who/what you used to be - it's probably one of those shared human experiences. I find myself slipping into that bad habit when I look at Headwaters (HW). I made some very good returns off this stock many years ago, back in the day when it was a coal treatment company with supposedly exciting catalyst technologies in the works. Management may have seen the writing on the wall with respect to the future of "clean coal," but the company's debt-fueled ventures into building products amidst the housing boom put this company into a bad spot for a number of years.

Now things are different. Headwaters is largely a residential building products company, but with some significant leverage to commercial and infrastructure construction as well. At the same time, the company has made some real strides in improving its debt situation and margin leverage. All of that aside, the sell-side has hiked its target on these shares by almost 100% over the past year (while the stock has climbed more than 40%) and it's worth wondering whether or not a large part of the housing recovery is already baked into the numbers.

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Wall Street Wants To Like Headwaters, But Should You?