Headwaters has a disappointing quarter
Headwaters Inc. (HW: 11.44 +0.29 +2.60%) is a company in the midst of a turn around of their major business operations. The company has been hit by the double whammy of the housing construction slow down impacting the construction materials division (50% of sales) and the complete phase out of Section 45K alternative energy business (coal to syngas). The syngas business was propped up by the tax credits which are now gone, but a couple of years ago provided about 40% of the Headwater’s profits.
To get the business back on a profitable track, management is taking their technology from the syn-gas business into some new areas and working to improve productivity in the construction materials side. At this point it appears the company is at the bottom of the turn around cycle and the numbers show it. Revenue for the 2nd quarter was $172 million vs. $274 million a year ago and net profits were a minus 22¢ per share for the quarter.
Results towards the turn around do look promising. The main thrust to increase revenues and profits again is the company’s clean coal process. They remove impurities from low value coal, increasing value and reduce NOX emission. The company now has 6 plants completed; 3 producing and 3 in start up, and 4 under construction. From about zero they shipped 190,000 tons of coal in the 2nd quarter. They will ship 600,000 to 700,000 tons in the 2nd half of 2008. Projections for 2009 are 2.5 to 3.5 million tons and up to 5.5 million tons in 2010. Profitability could be $15 per ton if current coal price projections hold up.
Headwaters also sells coal combustion products, i.e. fly ash. Fly ash is an environmentally friendly substitute for portland cement. It produces a better concrete and places like California are mandating higher percentages of fly ash in public works projects. This area should continue to grow.
In the construction materials area Headwaters sells architectural stone, bricks and blocks. They have repositioned some assets, sold off a stucco business, and are working to make $14 million in productivity improvements. The company is not expecting and improvement in the home building sector anytime soon, but they are setting themselves up to profit nicely when it does come about.
Headwaters is also working on a heavy oil processing process and has invested in a Korean hydrogen peroxide plant. These areas have a good possibility to go from cash flow negative to positive in the next several quarters.
I added HW to this site’s Growth Portfolio because I believe the company will be successful in it new efforts. Despite today’s negative financial news (and hammered stock price) I still think the future will be quite profitable for Headwaters.
Note: I have a long position in HW.
Change to Income and Growth Portfolios
On this blog I track a couple of portfolios, a Growth and an Income portfolio. The components of these protfolios are stocks that I have researched and believe will provide above market returns over time. The Income Portfolio consists of high yield dividend paying stocks. The Growth Portfolio is a little more complicated, holding growth companies, turn around and contrarian plays, and stocks that provide some trading opportunities.
I have written a couple of articles over the last few days concerning Terra Nitrogen Co. LP (TNH: 149.53 +1.49 +1.01%), a component of my Income Portfolio. I believe the high dividend days for this company are over, and a majority of the cash flow with go to Terra Industries instead to the shareholders of TNH. For this reason, I am dropping TNH from my Income Portfolio.
I will be adding Terra Industries (TRA: 45.97 -0.18 -0.39%) to the Growth Portfolio. In this article, I discussed the cyclical nature of TNH’s stock price. I will be looking for a similar pattern for TRA.
In my portfolios I have been tracking an equal dollar amount of each of the stocks starting each calender quarter and rebalancing each 3 months. I am working on a portfolio tracking system to be available on this site where I will make actual portfolio decisions concerning the timing of stock purchases and sales. Keep tuned!
Note: I currently do not hold a position in either TNH or TRA.
Update: Terra Nitrogen Post
Yesterday, I wrote a post on how the dividend payout of Terra Nitrogen Co. LP (TNH: 149.53 +1.49 +1.01%) will change going forward. To recap, the partnership agreement between Terra Industries (TRA: 45.97 -0.18 -0.39%) and Terra Nitrogen gives Terra Industries, as the owner of the general partner, increasing percentages of TNH’s distributable cash when said cash exceeds 71.5¢ per share, maxing out at 50% of distributable cash when the amount per share exceed $1.045.
I did my rough calculations for the recent distribution, giving 50% of the entire distribution to the GP, thus reducing the dividend from the paid $4.20 to a projected $2.10. I received a couple of comments here and at the Seeking Alpha version of the article “correcting” my calculation. Jack Sturm stated the new dividend would be $3.07 and an unnamed commentor at Seeking Alpha believes the dividend would be $2.60. After taking another look at my hasty calculation it is apparent the tiers need to be honored, otherwise, as an example, if the distributable cash was $1.10 per share and the GP took 50%, the dividend would be 55¢, below the “minimum” 60.5¢.
Let me give a little detail about the tiered cash split structure. If distributable cash is up to 71.5¢ per share the common shareholders will get 99% of the money. From 71.5¢ to 82.5¢ the common shareholders get 86% of the cash, 82.5¢ to $1.045: 76% and above $1.045 the distributable cash is basically split 50/50 between the common shareholders and the general partner. Here is a copy of the information I extracted from the 2007 10-K. partnership-distributions
Applying the tier percentages to last quarters $4.20 dividend leaves the common shareholders with $2.57 per share. I stand corrected! However, the bottom line is that unsuspecting, uninformed shareholders are going to get a nasty surprise when the next dividend is declared.
If the dividend change conversation is confusing read my previous article then come back to this one.
Note: I currently do not have a position in TNH or TRA.
New Energy Finance - Nex - Weekly Review
Time again for my weekly recap on the performance of the New Energy Finance renewable energy index -NEX for last week. For investors, the performance of the NEX is tracked by the PowerShares Global Clean Energy Fund (PBD: 29.29 +0.43 +1.49%).
Last week the NEX gained 0.8%, tenths better than the NASDAQ and S&P 500. The top performing sector was wind energy, gaining 4.3%. Solar energy was the laggard sector, losing 1.4%. Overall, 3 sectors were positive and 4 in negative territory.
Here are the winners and losers from the index for last week:
NEX top gainers since 22/04/08
Baldor Electric BEZ + 18.8%
Novozymes A/S Series B NZYM’B + 17.8%
Theolia TEO + 16.4%
Aventine Renewable Energy Holdings AVR + 13.9%
REpower Systems RPW + 13.6%
NEX top losers since 22/04/08
Medis Technologies MDTL - 20.3%
Zhejiang Yankon Group 600261 - 18.5%
Cree CREE - 13.8%
Evergreen Solar ESLR - 11.8%
Gushan Environmental Energy GU - 10.8%
Note: I currently do not have a position i
Silver Wheaton’s disappearing growth
In spite of average silver prices 22% higher than the previous quarter, Silver Wheaton (SLW: 14.44 +0.20 +1.40%) reports flat earnings for the first quarter of 2008. Revenues were up 11% over Q1, 2007 but 2.6% less than Q4, 2007. Especially revealing, silver ounce sales for the first quarter were down almost 16% from Q1, 2007 and 20% below the 4th quarter. Net earnings per share (fully diluted) came in at 11¢, a penny higher than the first and last quarters of 2007. Only the higher silver prices saved SLW from a truly devastating quarter.
Silver Wheaton is a company that investors and analysts have been watching for 30% to 40% annual revenue and earnings growth rates. However, over the last eight quarters, total ounces of silver sold have been trending downward and earnings per share have been flat, bouncing between 9¢ and 11¢ per share. Over the last few quarter the management has stated that silver shipments from the mines have been delayed from planned, but the delayed silver does not seem to be adding to silver volumes in the following quarters. For this quarter the company again states that about 460,000 ounces from the “plan” were delayed or the ore mined was of lower silver content.
Silver Wheaton has a unique business model that allows it to have a high percentage of revenues reach the bottom line. The company has low overhead and pays no taxes. The current problem is that the share are priced like the company is growing 40% a year, and they are not making those numbers. Unless the company can restart the growth of silver delivery, you are left with a stock which is primarily driven by the rise and fall of silver prices.
Silver Wheaton is projecting 13 to 15 million ounces of silver sold this year vs. 13 million in 2007. Their projections for 2009 and 2010 are 19 million oz. and 25 million oz. Projections are big growth, but now I think the company needs to show better quarter to quarter improvement. Today the share price is showing a pretty big drop, but I would be very cautious of SLW unless it falls quite a bit lower (I am thinking $10) or starts showing some nice quarterly growth.
Note: I currently do not have a position in SLW.
Terra Nitrogen vs. Terra Industries
With the recent payout of the first quarter distribution, there will be a big change for Terra Nitrogen Co. LP (TNH: 149.53 +1.49 +1.01%) shareholders. Although Terra Industries (TRA: 45.97 -0.18 -0.39%) has made no secret of the fact, the company-TRA, as general partner and major shareholder of Terra Nitrogen is now due to take a much larger portion of the quarterly distribution.
A little background. Terra Nitrogen LP is a limited partnership of a single nitrogen fertilizer plant. Terra Industries controls/owns the general partner and owns a bit over 75% of the partnership units. The partnership agreement includes a clause where the general partner receives a higher percentage of the distributable cash as the per share distribution exceed 60.5¢ in a quarter. The other part of the clause states the cumulative distributions must exceed 60.5¢ per quarter, so anytime the distribution is below that amount the GP must fore go its higher percentage until the shortfall is made up. After a string of low payout quarters the general partnership had built up quite a deficit to the minimum payout rule. Then the fertilizer gravy train arrived and TNH was able to make distributions that started to reduce the deficit. At the end of 2007 the deficit was at $6.70 per unit. With the last two quarter’s distributions totaling $8.65 the deficit has been wiped out and the original distribution sharing arrangement is back in effect.
Now for the interesting part. The distributable cash share arangement gives the GP higher percentages in tiers as the cash per unit exceeds 60.5¢. The top tier is hit at only $1.045, and above that level the general partner is entitled to 50% of the distributable cash. Put it the other way, the cash available for the limited partners (what we think of as shareholders) is reduced by half, or the dividend will be 50% less.
Let us see how the numbers would have worked out for the distribution announced last week. The distribution per share was $4.20 times the 18.5 million outstanding shares for a total of $77.7 million. Terra Industries holds 75% of the shares, so they collected about $58.4 million. With the back dividend deficit eliminated the GP (Terra Industries) would have taken about $39 million right off the top, reducing the distribution to $2.10 per share. Since Terra Industries owns the majority of the shares, their per share distribution would be down also, but their total share of the distributable cash would have been about $68 million vs. the $58.4 million they will receive from this latest dividend.
Terra Industries (TRA: 45.97 -0.18 -0.39%) had net earnings of $100.2 million for the first quarter, so the now in place sharing arrangement could boost their bottom line by about 10%.
As I said earlier, Terra Industries has not kept this a secret; it has been mentioned in the last two quarterly earnings conference calls and in the 10-K (I have the exerpt from the 10-K if anyone wants me to email it to them). Since they already own 75% of TNH, they stand to make even more. I think individual share holders have gotten excited about a company that was paying $2 to $3 /share/year now paying over $4 per quarter and have driven the price from $20 to $150 in about 20 months. I think many individual shareholders are in for a rude surprise when the next quarterly distribution is announced.
The second quarter should be an excellent one for Terra Nitrogen, but I do not think they will have $8+ per share in distributable cash to keep the dividend at current levels. At this point investors who own and like the business of Terra Nitrogen should sell their shares and invest in Terra Industries. If my analysis is correct, the parent is going to reap significantly higher rewards from TNH than individual shareholders will.
My analysis of this situation is from information I have gathered through Terra Industries’ recent conference calls and both company’s 10-K reports. If I have made a mistake here, I would really like to hear about it.
Note: I currently do not have a position in TNH or TRA.
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