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Headwaters Weighs Anchor

By Rich Smith - Updated Nov 14, 2016 at 10:45PM

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A Foolish chat with the CEO.

A few weeks back, The Motley Fool's Rich Smith had the chance to speak with Kirk Benson, CEO of Motley Fool Rule Breakers recommendation Headwaters (NYSE:HW). Our Rule Breakers subscribers have already had the chance to hear Kirk's thoughts on his company, the future of synfuel credits in America, and the challenges of developing our nation's coal resources in an era of global warming. Now you can, too. Here's an excerpt from the interview.

Rich Smith: Kirk, for the benefit of those who don't know Headwaters, can you give us a thumbnail sketch of the company?

Kirk Benson: We provide products, technologies, and services to the construction materials and energy industries. Headwaters has established a solid revenue base and has invested capital to create growth opportunities in both industries we serve. We are operating our business in three divisions: building products, coal-based products, and technology.

Smith: Three years ago, construction materials made up less than a quarter of your revenue stream. Last year, it was more than half. Peer into the future for us -- which of your business segments do you see as the growth drivers?

Benson: We anticipate that the coal-based products and the technology divisions will have growth rates that exceed the building products division. Which will be the biggest source of sales and profits five years down the line? Within five years, we would anticipate that our coal-based products division would be the largest sources of sales and profits. In 10 years, we would anticipate that the technology division would be our largest division.

Smith: Historically, a big part of your alternative energy revenue stream has been tied to a Section 45K (formerly Section 29) alternative fuels tax credit. What's the logic behind this tax credit, and how does it work?

Benson: The tax credit was designed to encourage development of domestic energy technologies. As evidenced by Headwaters' technology development, the credit has worked quite well, allowing us to become a world leader in advanced energy technologies.

Smith: The tax credit seems to contain a "donut hole." When oil is really cheap, there's a tax credit aimed at making synfuel profitable to produce and use. Presumably, when oil is really expensive, comparable to synfuel in price, synfuel will be able to compete with oil on its own merits. How is it that we've fallen into a situation today where oil is too expensive to give synfuel tax credits, but not expensive enough to let synfuel compete with it?

Benson: The original concept was that if oil prices are high, then there are sufficient market incentives to develop new technologies and the government would not need to provide a credit incentive. Although not perfect, the logic is at least reasonable.

Smith: As I understand it, this synfuel tax credit is due to expire at the end of this year. Can you give us an update -- is there any legislation in particular that we should be tracking?

Benson: There is no legislative effort to amend or extend the existing credit for solid synthetic fuel.

Smith: In its 10-K, Headwaters says, "Given current prices of coal and costs of alternative fuel production, we do not believe that production of alternative fuel will be profitable absent the tax credits." In the worst-case scenario of synfuel tax credits disappearing forever, at what price of oil does it become profitable for companies to manufacture synfuel without any government assistance?

Benson: There are a number of new technologies that we have developed. Our heavy oil upgrading technology is economical when oil is above $25 per barrel, depending upon light-heavy spreads. Our coal liquefaction technology can be competitive at $40 per barrel, especially when one considers an international site.

Smith: We often ask CEOs to list their competitors in order of the "threat" they pose. But working in several fields as you do, you've got a pretty diverse group of competitors, including Owens Corning (NYSE:OC), Alcoa (NYSE:AA), Lafarge (NYSE:LR), Cemex (NYSE:CX), Eagle Materials (NYSE:EXP), and Nalco Holding, which probably makes it difficult to rank them. So let's try another tack: Out of that field of competitors, can you pick one company that's doing something you especially admire, and tell us about it?

Benson: I have a lot of respect for Cemex. They have created a global basic materials company in a very short time and have been quite successful in leveraging their cash flow into strong market positions throughout the world.

Smith: The CEO of McCormick once told us how that company's cinnamon spice could be used to get rid of ants. What's one use or application of one of your products that might surprise us?

Benson: We may be able to use some of our nanotechnology to communicate with DNA to create an interactive diagnostic tool.

Smith: That's fascinating -- can you tell us more?

Kirk could, and he did. Read the rest of the interview to learn everything you ever wanted to know about Headwaters, and then some -- including how a coal and cement company of today could become a nanotech gene-tester of tomorrow. Current Rule Breakers subscribers can read the full transcript of this interview and learn the answer by clicking right here.

Not yet a subscriber? Then click here instead to get a 30-day free trial, complete with access to the rest of this interview and those with all of the other CEOs we've had the pleasure to speak with over the years. You'll also be able to see our current recommendations and our top stock choices for new money now.

Rich Smith does not own shares of any company mentioned in this article. The Fool has a disclosure policy.


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Stocks Mentioned

Headwaters Incorporated Stock Quote
Headwaters Incorporated
Alcoa Inc. Stock Quote
Alcoa Inc.
Owens Corning Stock Quote
Owens Corning
$91.80 (1.60%) $1.45
CEMEX, S.A.B. de C.V. Stock Quote
CEMEX, S.A.B. de C.V.
$4.55 (0.44%) $0.02
Eagle Materials Inc. Stock Quote
Eagle Materials Inc.
$135.75 (0.35%) $0.47

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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