Wedbush Moves To Sidelines At Headwaters, Lowers To Neutral

May 26, 2015

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In a report published Tuesday, Wedbush analysts downgraded the rating on Headwaters, Inc. (NYSE: HW) from Outperform to Neutral. The price target was maintained at $21. The analysts believe that the intermediate-term dynamics for the company, while being strong, are showing signs of moderating.

“We continue to view Headwaters (HW) as one of the few names in the Building Products Sector that can benefit from the cement shortages,” the analysts said, while also expressing their concern regarding a potential deceleration in top line growth in FY16 and FY17, “as acquisitions are integrated, residential housing construction remains modest and repair and remodeling spending is uneven.”

The analysts also expect the company’s mix to be negatively impacted by site service contracts from utilities, which in turn is likely to drive deceleration in incremental EBITDA margin in the Heavy Construction Materials business. A lack of M&A is also expected to adversely impact the EBITDA margin.

According to the Wedbush report, Headwaters’ “net price and volume growth rates expected within HCM segment will be difficult to exceed over the next several quarters.”

“And while we admire the company’s focus on productivity improvements, cost reductions, and lowered borrowing rates, growth investors should move to the sidelines due to decelerating top-line growth and lower incremental EBITDA margin commencing with FY16/17,” the analysts added.