Natural resources innovator Headwaters (NYSE:HW) is growing quickly and making money. Let's take a closer look and see whether it's a good investment.

The record results for the fourth quarter handily beat analyst estimates. Revenue was $315.1 million, $7.7 million over expectations. Earnings, at $1.09 a share, were $0.28 above projections.

Headwaters has grown quickly through acquisitions. Even after adjusting for acquisitions, revenue increased 19% and operating income jumped 27% in fiscal year 2005 over 2004.

One dark cloud on the horizon is the 2007 expiration of a tax credit that supports domestic fuel alternatives to foreign oil. Headwaters licenses its synthetic fuel process and sells a latex-based bonding agent to synfuel customers. Although this tax credit has been renewed in the past, there's no guarantee it will be again or whether Headwater's specific process will be covered by any renewal.

For now, the company expects synfuel facility owners will continue to operate if oil prices stay at today's elevated levels. Still, with chemical reagents and license fees running at $77.0 million (24.4% of total sales) this quarter, a slowdown in this business would be significant to the company.

What has investors excited about this company's future is a number of innovative products. Yesterday, the company announced it has begun a commercial-scale demonstration project of its (HC)3 Heavy Oil Hydrocracking Technology. To be completed in 30 days, it offers the hope of converting residual oil feedstock into higher-value distillates that can be further refined into gasoline, diesel, and other fuel products.

Also holding promise is a hydrogen peroxide pilot plant test that was successful. A demonstration facility will now be built that will provide the engineering data needed to bring this technology to commercialization.

The company has also signed coal-to-liquids project analysis agreements in India, the Philippines, and China.

The company is projecting that fiscal year 2006 earnings will be between $2.60 and $2.75 a share (up from $2.40 this year). At the low end of guidance, that prices the stock at 12.7 times 2006 earnings. That's a reasonable valuation for a company on track for 10% earnings growth in 2006.

But consider this: Analysts expect earnings to grow 24.0% annually for the next five years. If the company's pilot and demonstration technologies take off, that kind of growth is possible. So for those with a long-term outlook who are also willing to accept that the tax credit will not get rescinded and analysts are not being too optimistic, the stock -- with a multiple half of its expected growth rate -- is bargain priced.

Furthermore, provided traditional energy sources remain at elevated costs, the demand and associated cost for alternative sources becomes much more viable for prospective consumers. But in assessing the company and the stock, those are questions as much as they are answers, so stay tuned folks.

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Fool contributor W.D. Crotty does not own any shares in Headwaters. Click here to see the Motley Fool's disclosure policy.