Why DA Davidson Initiates Headwaters With A Neutral Rating On Friday Morning

DA Davidson started coverage of construction products supplier Headwaters Inc HW with a Neutral rating and $24 price target, which represents 16 percent upside from Thursday's close.

Analyst Brent Thielman said Headwaters is growing at a healthy pace with solid pricing fundamentals, particularly in Construction Materials, and would benefit from favorable cyclical demand trends.

‘While our price target indicates further upside in the stock from current levels, the return potential is insufficient to warrant a more favorable recommendation at this stage and we are initiating coverage with a NEUTRAL rating," Thielman wrote in a note.

The analyst projects improvement in overall construction momentum over the next two years, driven by residential activities and infrastructure development.

In addition, Thielman highlighted that the increasing acceptance for fly ash as a legitimate binder in concrete production would result in incremental share gain opportunities for Headwaters. The analyst noted that the company is a leading national supplier of fly ash, which has been proven to save costs and improve longevity of finished concrete products.

Thielman sees adjusted earnings for fiscal 2016 and 2017 of $1.22 and $1.40 per share, respectively. Street expects earnings of $1.31 for fiscal 2016 and $1.62 a share next year.

"We are optimistic in the growth prospects for both the company's high value CCP (coal combustion products) and high-value residential building products over the near-term and are encouraged by Headwaters' much more prudent management of capital and leverage so far this cycle," Thielman noted.

However, the analyst has warned that cyclical disruptions to growth are a constant risk in either industry and "could present significant downside risk to the shares should Headwaters' growth story stall or reverse."

Meanwhile, Headwaters is set to report its second quarter results before the market opens on Tuesday, May 3, 2016. Wall Street expects earnings of $0.09 a share on revenue of $199.77 million.

Shares of Headwaters were down 3.35 percent to $19.92.