American Ecology Corp. Is Still A Good Buy

| About: US Ecology, (ECOL)

We view 2007 as a year for solidifying the industry position of American Ecology Corp. (NASDAQ:ECOL). Last year the Company invested heavily in augmenting transportation and materials handling equipment and we expect this added capacity to stimulate revenue growth throughout the year. Nonetheless, the Company recently issued guidance for financial performance in the coming year that reflects relatively tepid growth. American Ecology’s new guidance for 2007 earnings per share is in a range of $0.92 to $1.02. Guidance for capital expenditures is $12.0 million versus $20 million in 2006.

In keeping with our approach of modeling the upper end of the Company’s guidance, we have adjusted our sales and margin assumptions in 2007. We reduced the sales estimate to $125.0 million (from $128.0 million) and adjusted our cost and expense rates upward slightly to reduce our net income estimate to $18.7 million (from $20.3 million) or $1.01 per share (from $1.10). The key take away from the exercise is the sales growth and margin expansion required to produce the management’s guidance is modest and well within the Company’s capacity to produce given its customer relationships, track record in winning new business, building strategic relationships with waste brokers and added transport and handling capacity.

In our view, the stock has pulled back in recent weeks to price levels that present a more compelling investment opportunity. However, we updated our trading guide but did not change our price target or suggested price levels for establishing a position, and we reiterate our buy recommendation for ECOL shares. We anticipate the reduction in the consensus estimates to weigh on the stock well into the first calendar quarter of 2007. However, in ratcheting down expectations, the Company’s quarterly comparisons will be less intimidating throughout the next year.

ECOL 1-yr chart

Disclosure: Author has no position in ECOL.