The American housing sector seems to have bottomed out. Many experts are convinced it is picking up again. And this is why Headwaters Inc. (NYSE: HW), a leading manufacturer in the sector, is finding a fertile niche.
Headwaters produces building products for new residential, residential remodeling, and commercial construction. Headquartered in South Jordan, Utah, it is one of America’s greatest recycling success stories. It eliminated 75 percent of paper waste at its corporate headquarters, and its pallets are repaired for re-usability. Its online documents and instructional video allow it to consume less paper, ink and energy.
But that is not what is most interesting about this company. Its Siding Accessories products control approximately 75% of their niche market, while its manufactured stone products take roughly 25% market share. Apart from this, the company’s concrete block business dominates the Texas block market with roughly 65% of the market. Headwaters Resources / Heavy Construction Materials segment controls almost half of all fly ash sales in the U.S. today.
Headwaters recently announced that it has entered into an agreement to acquire the assets of Kleer Lumber, Inc., a manufacturer of high quality and Eco-friendly cellular PVC trim board and molding products. If successful, the acquisition of Kleer Lumber will add such products as trim boards, millwork, sheet stock, and paneling to Headwaters’ Light Building Products offerings.
In its 2012 fourth quarter report, Headwaters’ revenue increased 8% to $633 million, while its gross profit margin improved by 230 basis points to 29.8%. Also operating income increased 120% to $15.9 million, while the company repaid $3.5 million of subordinated debt in the quarter. Gross profit increased by 16% to $56.7 million in the fourth quarter of 2012, compared to $49.0 million in the fourth quarter of 2011.
“We continued to see revenue growth in the fourth quarter, driven primarily by improvements in new residential construction and market share gains,” said Kirk A. Benson, Chairman and Chief Executive Officer of Headwaters. “We maintained exceptional operating leverage with contribution margins in excess of 47%, greatly expanding operating income in an up market. For the quarter, operating income grew by 120% to $15.9 million.”
Due to the rebound of the housing industry, the numbers will become even stronger in the future. Meanwhile, Headwaters sports a conservative business model, having a market capitalization of $599 million and trading around $9.79 per share. Its 52-week range is between $2.26 and $9.79. Though it seems to be have peaked, it trades at a cheap rate compared to bigger rivals such as Cemex , SAB (NYSE: CX), CRH PLC (NYSE: CRH), and Weyerhaeuser Co (NYSE: WY). This puts it in a good position to reap profit when growth accelerates in the housing sector.