On Election Day, Motley Fool Rule Breakers pick Headwaters (NYSE:HW) left investors uninspired. That's hardly surprising; sales fell 13% in the fourth quarter, while net profit collapsed by 38% over the same period. The shares are trading more than 14% lower as I write.

Was the news really that bad? Well, yes and no. Yes, because the company's synfuel business, which depends entirely on an expiring tax credit, still accounts for 73% of earnings. No, because management has cut high-rate debt, reduced interest payments, and stabilized the balance sheet.

In addition, the company is making progress on research into alternatives for synfuel. Take heavy oil, for example. Headwaters recently completed its second commercial run of the technology, which proposes to transform waste or other difficult-to-refine crude into usable product. Management says a meaningful breakthrough in this area could be worth $50 billion or more to the refining industry.

But that's long-term. For now, Headwaters says that it will earn $1.60 to $1.80 per share during 2007, which, while down from $2.19 for fiscal 2006, is better than the $1.56 the Street had projected.

Sadly, those estimates may not mean much. Headwaters has $30 million in deferred revenue from its synfuel business. If history persists, 35% to 40% of that will be phased out thanks to high oil prices. The rest, however, will likely be recognized as one-time 2007 revenue.

That's $18 to $20 million, which could account for $0.27 to $0.30 a share in one-time 2007 gains. Why so much? Because synfuel licensing, at 100% margin, would be impeded only by taxes on the way to the bottom line. Headwaters' 26% historical tax rate doesn't make for much a barrier.

Now, mix in the $1.00 to $1.05 per share that management expects the core business to generate next year, and we have a normalized per-share range of $1.30 to $1.53.

Of course, that assumes that the synfuel business, which will contribute essentially nothing to 2008 income, is worth at least $0.30 a share. I'm not so sure it is. Perhaps it's best to simply value the construction business as a stand-alone entity?

Fortunately, we have the figures to do exactly that. According to Yahoo! Finance, the cement industry -- including Lafarge (NYSE:LR) and Stock Advisor pick Cemex (NYSE:CX) -- has an average multiple to earnings of 17.9. Applying that to Headwaters' forward guidance of $1.00 to $1.05 a share puts fair value between $18 and $19 -- compared to the current price of $21.50.

Does that mean Headwaters is still expensive? Maybe. A better question might be whether the firm's declining synfuel business, and the fuel-recycling alternatives it has in development, are worth at least $2 a share. I'm inclined to say yes, especially if there's any chance that Headwaters' work today could unlock a $50 billion market tomorrow.

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Fool contributor Tim Beyers no longer owns shares of Headwaters. Get the skinny on everything Tim is invested in by checking his Fool profile. The Motley Fool's disclosure policy is a rebel with a cause.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.