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Technology Stocks : HDWR: Headwaters (alternative energy) -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (23)	1/31/2008 9:21:34 AM
From: Dennis Roth	Respond to of 26

Headwaters Inc. (HW): We prefer to be on the sidelines at this point in cycle; stay Neutral - Goldman Sachs - 01/30/08 What's changed Headwaters reported its fiscal 1Q. Key takeaways were: (1) EPS of $0.23 was below our estimate of $0.35 on account of lower gross margins in the Section 29 business. (2) Guidance for 2008 was reaffirmed to the range of $0.95-$1.35. (3) For its alternative energy business, there were limited commercial sales news out of HCAT, but some positive signs from the coal cleaning business ramping. Implications Currently, Headwaters business is driven by its non-alternative energy segments—construction materials and coal combustion products. Even though Headwaters has fared better than many so far in the construction cycle, we are not bullish on the cycle at this time. While coal cleaning has shown some positive signs of commerciality, the other alternative energy ventures have not driven meaningful economics so far and we are reticent to model in their potential at this time. We maintain our Neutral rating. We are updating our FY2008-2010 EPS estimates to $1.08, $1.04, $1.16 from $1.21, $0.97, $1.10 to account for the latest quarter’s reported information and guidance for FY2008. Valuation We are updating our six-month target price to $12 from $14 previously. Our price target is derived from P/E on out-year analysis discounted back to the present (14X FY2012E EPS of $1.48 discounted back at Ke of 14%) as well as taking into account DCF analysis. We use FY2012, assuming it is more of a mid-cycle estimate. Key risks (1) If the HCAT technology begins to gain traction, our estimates may prove too conservative. (2) If the construction materials business holds up less well than it has, we may be too optimistic in our forecasts for this segment.