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By Cagdas Ozcan

Heckmann Corporation (HEK), an environmental services company, offers a variety of services to oil and gas companies. Even though, Heckmann provides many services, water treatment continues to be its core business. The environmental services industry is growing at an incredible pace and provides an excellent opportunity for the participants to achieve phenomenal growth. In its most recent earnings announcement, the company announced that it will change its name to Nuverra Environmental Solutions. I believe Heckmann has a lot of upside potential, and decided to use my fair value model. Results of the model are discussed below.

As of the time of writing this article, Heckmann stock was trading at around $4.15, with a 52-week range of $2.60 - $5.14. It has a market cap of about $1.05 billion. Heckmann has forward P/E ratio of 50.3. P/B, P/S, and P/CF ratios stand at 1.4, 1.9, and 57.1, respectively. The operating margin is -3.3% while the net profit margin is -1.2%. The company has lower debt load than the overall industry average. Current debt-to-equity ratio of the company stands at 0.6, compared to 1.1 for the industry.

Out of ten analysts covering the stock, two have a buy recommendation, one believes the stock will outperform, one is asking to accumulate, four analysts are neutral and only one analyst has a sell recommendation. Average five-year annualized growth forecast estimate is a little too optimistic at 27.50% by the analysts.

We can estimate Heckmann's fair value using discounted earnings plus equity model as follows.

Discounted Earnings plus Equity Model

This model is primarily used for estimating the returns from long-term projects. It is also frequently used to price fair-valued IPOs. The methodology is based on discounting the present value of the future earnings to the current period:

V = E0 + E1 /(1+r) + E2 /(1+r)2 + E3/(1+r)3 + E4/(1+r)4 + E5/(1+r)5+ Disposal Value

V = E0 + E0 (1+g)/(1+r) + E0(1+g)2/(1+r)2 + … + E0(1+g)5/(1+r)5 + E0(1+g)5/[r(1+r)5]

The earnings after the last period act as a perpetuity that creates regular earnings:

Disposal Value = D = E0(1+g)5/[r(1+r)5] = E5 / r

While this formula might look scary for many of us, it easily calculates the fair value of a stock. All we need is the current-period earnings, earnings growth estimate, and the discount rate. To be as objective as possible, I use Morningstar data for my estimates. You can set these parameters as you wish, according to your own diligence.

Valuation

Historically, the average return of the DJI has been around 11% (including dividends). Therefore, I will use 11% as my discount rate.

In order to smooth the results, I will also take the average of ttm EPS along with the mean EPS estimate for the next year. The average EPS for Heckmann is $0.07.

While analysts tend to impose subjective opinions on their estimates, the average analyst estimate is a good starting point. Average five-year growth forecast is 27.50%. Book value per share is $3.01.

Fair Value Estimator

V0

E0

$0.07

V1

E0 (1+g)/(1+r)

$0.08

V2

E0((1+g)/(1+r))2

$0.09

V3

E0((1+g)/(1+r))3

$0.11

V4

E0((1+g)/(1+r))4

$0.12

V5

E0((1+g)/(1+r))5

$0.14

D

E0(1+g)5/[r(1+r)5]

$1.27

BV

Equals

$3.01

Fair Value Range

Lower Boundary

$1.88

Upper Boundary

$4.89

Potential

17.88%

(You can download FED+ Fair Value Estimator, here.)

I decided to add the book value per share so that we can distinguish between a low-debt and debt-loaded company. The lower boundary does not include the book value. According to my 5-year discounted-earnings-plus-book-value model, the fair-value range for Heckmann is between $1.88 and $4.89 per share. At a price of about $4.15, Heckmann is trading below the upper boundary of its fair value range. The stock still has up to 18% upside potential to reach its fair value maximum.

Summary

Shale oil and gas are going to play an important role in meeting the energy needs of the country. The use of fracking will increase the need for the services of environmental services companies. Heckmann stands to benefit from this increase in demand. It is one of the biggest players in the market at the moment. I believe there is a lot of room for growth in this industry, and industry is currently in the early growth stages. While the stock is a bit volatile, Heckmann Corporation might prove to be a solid investment in the long-term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Cagdas Ozcan, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Source: How Much Is Heckmann Worth?