American Ecology Corp. (NASDAQ:ECOL) is a member of the somewhat exclusive club of hazardous waste management service providers. Since passage of landmark legislation such as the Solid Waste Disposal Act, the Resource Conservation and Recovery Act [RCRA] and the Comprehensive Environmental Response, Compensation and Liability Act [CERCLA], the U.S. has been attempting to clean up contaminated land and prevent further damage to human health and the environment by closely monitoring hazardous waste generation, transport, treatment and disposal. These regulatory actions inspired a new industry of service providers, but under the stringent requirements set down by the Environmental Protection Agency for hazardous waste handling, only a select group has been permitted to play.
American Ecology is one of a small group with the required permits to transport, treat and dispose of the three million tons of hazardous waste generated in the U.S. each year. The company has accumulated a strong asset portfolio of disposal facilities and transportation infrastructure that, coupled with an array of treatment services, is winning new customers for both site cleanup projects and waste generated by routine processes. The company has served over 590 customers so far in 2006.
The company has a lengthy history of operation, but did not become an influential player until the last few years. Reorganization beginning in 2001 under new management has given the company a clearer focus on target markets and a more rational marketing strategy utilizing both direct sales and industry alliances. Sales have climbed to $102 million in the twelve months ending September 2006, compared to $40 million in 2001. A conservative fixed cost structure with significant operating leverage has also led to an improvement in profit margins from 7.4% in 2001 to 15.1% in the most recent twelve month period.
High profitability and good cash flows have made it possible for the company to groom a strong balance sheet with no debt and ample cash balances. Cash flows have been sufficient to provide for a regular dividend as well as build a war chest for future acquisitions. While the company made a misstep or two in previous acquisitions, the present management team made a success of the addition of the Idaho facility through the purchase of EnviroServices of Idaho.
We initiated coverage of American Ecology with a buy rating based on the company’s penetration of the toxic waste disposal market. Its growing list of customers include the U.S. Government and notable manufacturers such as Honeywell, Inc. and Boeing, oil and gas refiners, pharmaceutical and biotechnology players and utilities. The company has grown steadily over the last five years and is poised to break the $100 million annual sales threshold.
Results can be variable as large environmental clean-up projects are subject to programmatic and budgetary delays. However, the base business of waste resulting from routine manufacturing and processing activities is adequate to cover fixed costs and allow the company to produce a profit. American Ecology’s waste disposal sites are primarily located in the arid western region of the U.S., giving potential customers added confidence in the reliability of its disposal services. Furthermore, the company has added transportation and handling capabilities in the last two years that enables it to maximize the utilization of its disposal sites at lower costs. American Ecology has also enhanced its market reach through alignments with regional and local waste brokers which do not have toxic waste disposal capacity.
We believe the combination of its superior service offering, cost savings and improved market reach, bodes well for growth in sales and earnings. Our estimate for 2007 sales is $128.0 million providing $1.10 earnings per share. Our price target of $25.00 represents a 22.7 multiple times earnings.
The hazardous waste disposal sector is not highly populated with service providers. American Ecology is among very few that are exclusively focused on this segment. Waste Management, Inc. (WMI) provides routine waste management services to commercial, industrial and residential customers, including collection and disposal. Although Clean Harbors (CLHB) provides wastewater treatment services, recycling and waste-to-energy generation, it is also focused on non-hazardous and hazardous waste treatment and disposal. Onyx Environmental Services is one of four divisions of Veolia Environment (VE), a France-based environmental services provider. Onyx claims to be number two worldwide in hazardous industrial waste management.
There are also several private, regional waste management service providers which operate the remaining six licensed and permitted hazardous waste facilities in the U.S. For example, Waste Control Specialists of Texas (private) is among the strongest of the regional competitors, with licenses for a series of hazardous waste categories. It has one treatment and disposal facility located in Texas, which limits the extent to which it competes with American Ecology in the Southwestern U.S. The other commercial radioactive waste disposal facility is operated by Envirocare of Utah, Inc. (a subsidiary of Energy Solutions, Inc.). Its facility is located west of Salt Lake City in a lakebed. This facility is limited to Class A low-level radioactive waste.
Disclosure: Neither the principal nor any persons associated with Crystal Equity Research holds a beneficial interest in any of the securities mentioned in this article.
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