It's not a pretty subject. Most don't like trash talk. But, recent due diligence about smart metering and smart grids led to a question worth pursuing. As traditional analog meters are replaced, what about disposal? It is estimated there are 1.5 billion electric meters worldwide. Gas and water meter counts simply add to the challenge. Now while that particular question didn't get a definitive answer, absorbing details about a waste management company should not go to waste.
US Ecology (ECOL) is having a record-breaking year while it provides safe disposal of hazardous and radio-active materials. Its broad range of services includes treatment and disposal, transportation services, recycling and lab support. US Ecology's business model is structured into two tiers - base business and event business.
It hasn't been unusual, in the past, for US Ecology to need large "events" or projects to surpass typical performance. Event business is defined as one-time discrete waste clean-up projects that vary in size, duration and pricing. Base business is recurring business derived from companies that collect and aggregate waste from their direct customers, long-term government clean-up projects and petroleum refinery customers.
In the middle two quarters of 2012, US Ecology set quarterly records based on its base business rather than event business. In fact, US Ecology beat quarterly EPS estimates in the past four quarters by an exceptional average of 48%, a minimum of 16.7% and a maximum of 77.3%. EPS estimates for the past four quarters totaled 92 cents but EPS actuals were an impressive $1.38. Its return on equity for the trailing twelve months is an industry leading 25%. US Ecology is crediting several factors for its record-setting success.
The breadth and diversity of its assets provides advantages. US Ecology has five facilities in the United States and one in Canada. Its assets include a railcar fleet specifically for the transportation of waste. By bundling transportation and disposal services, US Ecology has won multiple projects.
The treatment and disposal of hazardous waste is highly regulated. US Ecology is one of only a few companies with the appropriate state and federal licenses and permits. It also has a reputable record of compliance and safety. In April, 2012, US Ecology received notification from the Environmental Protection Agency (EPA) that its thermal recycling operation did not comply with the Resource Conservation and Recovery Act of 1976. In October, 2012, US Ecology settled with the EPA. The EPA asserted US Ecology processed and stored hazardous waste without a permit even though US Ecology had an exemption from the Texas Commission of Environmental Quality. At no point in the situation was human health or the environment endangered. Now that the matter is clarified, US Ecology's thermal recycling business opportunities should increase.
Base business is expected to continue to grow and US Ecology has a healthy pipeline of event business. The pipeline includes projects with higher margins for treating and disposing of niche waste. In May, 2012, US Ecology acquired a chemical and industrial byproducts treatment and reuse facility in Detroit, Michigan previously known as Dynecol and renamed it US Ecology Michigan. US Ecology Michigan provides US Ecology even more opportunity to win event business.
In addition to a respectable revenue growth trajectory, US Ecology pays a healthy 3.1% dividend. US Ecology's cash on hand is only $5.52 million and long-term debt obligations are $49.5 million. Both the base business and event business are susceptible to variability due to the types and amount of waste, law or regulation changes, weather, funding and economic conditions, and other pertinent factors. Still, US Ecology is confident that future operating cash flow will be sufficient to cover cash requirements including dividend payments.
Investors should realize US Ecology is a specialized waste management company. Its market cap is significantly smaller than industry leaders Waste Management Inc. (WM) and Republic Services Inc. (RSG). The two industry leaders garner steady revenues from a broad diversification of waste management services. Both pay attractive dividends. But, larger companies dealing primarily with municipalities have less opportunity for expansion or for increasing profit margins.
As awareness about environmental issues becomes more and more mainstream and green education and efforts increase, the directives of waste management may well shift from economic considerations to expending time, effort and money on initiatives that make societal sense. Government regulations may well begin to force minimizing waste, maximizing recycling, and further protecting public health and the environment. Such initiatives should work in favor of niche players like US Ecology. Trash talk may just end up being chic.