Headwaters Hits Headwinds

My mama always told me: Life's not fair. I suspect that right about now, Headwaters (NYSE: HW) investors would agree.

After reporting a fiscal fourth quarter far better than the one Wall Street was expecting on Tuesday, the alternative energy-cum-construction materials company saw its shares rocket nearly 8% in value -- only to execute a U-turn-cum-swan dive as the market imploded yesterday. By the close of trading on Wednesday, the shares had given up all their Tuesday gains and more, with a 10% drop. Market sentiment aside, the latter development seems as inexplicable as the former was rational.

For the fourth quarter, Headwaters reported:

• 17% sales growth, year over year, to $322.5 million.
• a $1.67-per-share loss that, but for the one-time goodwill impairment charge we discussed on Monday, would have been an estimate-trouncing $0.59-per-share profit.

For the year, the respective numbers were:

• 8% sales growth to $1.2 billion.
• $0.47 per share after the charge, or $2.53 before it wrecked the year's net.

While no one likes to see losses -- investors least of all -- most of us presumably factored the goodwill charge into our valuation of the company, and were prepared for the Q4 loss. Hence, the charge cannot be blamed for yesterday's share-price collapse. Was there any reason for it at all?

None that I can see
While everyone else in the world of construction materials seems to be flailing -- witness the troubles at Home Depot (NYSE: HD) and Builders FirstSource (Nasdaq: BLDR), and the losses at Lennar (NYSE: LEN), Ryland (NYSE: RYL), and Centex (NYSE: CTX) -- Headwaters' niche alterna-cement business is coping relatively well. Revenues from coal-combustion products (fly ash used in Portland cement) grew 10% year over year in Q4, with further growth predicted through 2008.

Sales of construction materials grew ever so slightly -- and while "downward pressure on sales" is forecast for the coming year, so is "further improvement in operating margins." When the rest of the construction industry seems to be undergoing an uncontrolled demolition, even these modest successes deserve a standing ovation.

Or, rather, they would ... if life were fair.