Getting Dirty with Fundamentals: Waste Industry Offers Value

If “one man’s trash is another’s treasure”, a scan of the waste management industry returns a list of 10 discarded, forgotten stocks that have treasure potential. 

After digging through the 10 stocks that compose this group, American Ecology (ECOL) looks like the standout in the group, with a PEG near 1, very high management efficiency ratios, ZERO debt, strong margins, and an excellent balance sheet.  Also yielding a 2.7% dividend yield makes this a stock that should be in every investor’s portfolio. The company is expecting a boost in the second half of 2008 from the introduction of a new thermal/recycling service in Texas.

Many of the stocks in this group have outperformed the broader market this year, with Allied Waste (AW), Clean Harbors (CLHB), American Ecology, Waste Connections (WCN), Stericycle (SRCL), and Waste Management (WMI) all exhibiting long term up-trends.

The waste industry has very high barriers to entry due to government regulation and large capital expenditures. The industry also is benefiting from increased regulation from government environmental agencies, which stabilizes prices and leads to more companies outsourcing waste disposal. 

Some of the companies specialize in the cleaning and recycling businesses, while others are your everyday garbage men.  The most booming segment is the management of hazardous waste, an area where American Ecology, our featured stock, and Casella Waste (CWST) specialize. 

Even in an economic slowdown, waste management is the ultimate recession proof business. And as more nations around the globe industrialize, there will be continued growth in the sector. Strong cash flow growth and a high quality of earnings makes these stocks very good investments for traders and investors seeking a fairly low-beta way to take a long position after 40%-plus market declines since late last year.

Looking at a compilation of fundamental data (See Table Below, stocks in green pay dividends), Allied Waste looks cheap on a sales and book value basis, but growth is a concern, while margins remain strong. Clean Harbors has been the second best performer of the year, benefiting from the increased activity in the rail and oil sectors, and is also trading at a bargain level that is tough to ignore.

Another positive for this industry is the recent “merger gone wrong” among Republic Services, Waste Management, and Allied Waste. This is just the beginning of things to come; the larger players will be heavily shopping for smaller value companies that can add diverse business lines and fuel growth (Heritage Crystal Clean (HCCI) and Perma-Fix (PESI) did not make the screen, but are two micro caps worth a look). 

A company like Stericycle (SRCL), the major player in medical waste management, would make a great acquisition target as a high growth/high margin asset.

All in all there are many reasons why waste management stocks can continue to outperform, and in this market that has been stricken by “bad assets and garbage balance sheets”, it is a very fitting industry to bring us out of this mess.

“Haste makes waste”, but in this scenario, swift action is necessary to buy waste companies at bargain levels, before the big money recognizes the potential.

American Ecology is the must-buy stock, and there are several others that are very attractive for those seeking a sector play.

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Disclosure: Author has no position in any of the aforementioned securities.