Choppy Headwaters Still to Come

Every investor makes mistakes. Today, I'm wondering if I goofed with Motley Fool Rule Breakers pick Headwaters (NYSE: HW  ) . The coal recycler reported that sales and adjusted per-share earnings declined 4.1% and 25.6%, respectively, over last year's third quarter.

Blame the Feds. Congress appears to be done with the debate over whether to re-up a tax credit that made a significant portion of Headwaters' alternative energy business profitable. Now, CEO Kirk Benson says, 33 of 46 plants that had used the company's chemical reagent for making synthetic fuel have either shut down or significantly curtailed production.

Headwaters sharpened its guidance for the rest of the year as a result. Now the company says that, unless legislative action is taken to restore the credit, it will earn between $2.00 and $2.15 per share for the full year. Roughly six weeks ago, Headwaters cut its projection to $2.00 to $2.70 per stub.

Frankly, $2.15 may be pushing it. But it is possible. During fiscal 2004 and 2005, for example, Headwaters grew the bottom line more than 20% from Q3 to Q4. Should management somehow deliver a similar performance, Headwaters could earn $33 million in net profit during the fourth quarter, which would bring full-year results to $107.1 million, or $2.20 a stub using the current diluted share count.

Sill, that strikes me as an aggressive estimate. And it's also nowhere near the $2.70 a stub that some investors -- such as those who are bidding up the shares by more than 3% as I write -- were hoping for.

It's hard to write a story like this, for I own shares of Headwaters. I also own a put to protect my position from volatility. That has helped some, but, like many, I'm still down at least 30%. I'd be willing to stand by the stock if I thought there was a chance of a resurgence on the bottom line. Sadly, I don't see that happening soon. With the Section 29 credit all but gone, and promising catalysts at least a year away, Headwaters is, for the moment at least, a building materials company in search of Rule Breaking growth.

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Fool contributor Tim Beyers hasn't ever seen coal waste, but he's pretty sure his oldest son -- a wannabe construction worker -- would love it. Tim owns shares of Headwaters. You can find out what other stocks he owns by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.


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