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Building Back With Headwaters


Headwaters () (HW) used to be only an energy play, but lately its construction-materials business has been catching the eye of investors. Zacks Investment Research, for one, tags Headwaters a buy in good part because of the expected leap in demand for construction materials to cope with the havoc wrought by Hurricane Katrina. Mario Ricchio of Zacks sees Headwaters as a "niche producer" of two key materials: fly ash and manufactured stones. The proportion of fly ash as a binding material in concrete has been rising, he notes, because it increases its structural strength. Headwaters' fundamentals are "extremely positive," says Ricchio. He forecasts earnings of $2.23 a share in the year ending Sept. 30 on revenues of $1.05 billion (boosted by acquisitions), rising to $2.67 in fiscal 2006 on revenues of $1.16 billion. That's up from $1.69 in 2004 on $554 million. Another bull on Headwaters is Richard Steinberg, president of Steinberg Global Asset Management, which owns shares. He sees it as a little-known and undervalued play. In addition to building materials, Headwaters is also in the business of converting coal and heavy oil into liquid fuels that are used by power generation plants to comply with environmental standards. The energy business accounts for 35% of total revenues, while construction materials are expected to bring in about 50% this year. Industrial services provide the remainder. Its stock -- after rising sharply from 26 in January to 45 in July -- has eased to 36. But Steinberg sees it regaining its upward momentum soon. His 12-month price target: 48.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial


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