The next environmental catastrophe could be good for Clean Harbors bonds
We have developed a process to screen, review, select, purchase and monitor high yielding corporate bonds. Each week we screen thousands of corporate bond listings to find what we believe to currently be the best corporate bond for investors needing or seeking higher yields with the least amount of risk as possible relative to its projected return. The following is our review process, along with supporting documents, showing why we believe this 5.8% bond with a 3 year call in for Clean Harbors Inc. (CLH) passes the criteria for our clients.
Step 1 - Assessing the Yield Curve
Currently we are seen a large number of investors waiting for the market to calm before committing capital. As the markets stabilize, perhaps there will also be a greater realization that the yields of CDs and Treasuries are even lower now than they were just a few short months ago, with 10 year Treasuries currently trading around 1.78 % yield. Considering the August 2011 inflation rate was 3.8 percent, 10 year Treasuries are showing about a 2% negative income spread, which is the lowest we can remember. We call this slow, but constant, erosion of wealth to inflation, “Going Broke Safely.”
Step 2 - A look at the issuer
Clean Harbors, Inc. is a leading provider of environmental, energy and industrial services, and the largest hazardous waste disposal company in North America. After reviewing their most recent earnings release, we find that the underlying business has not only been improving in this difficult economy, they have also increased their profit forecast and profit margins.
Step 3 - We like companies that are profitable
Clean Harbors had 29.2 million in pretax profit, or $ .55 per share fully diluted, for the second quarter of 2010. Alan S. McKim, Clean Harbors chairman and CEO, stated, ”The second quarter of 2011 was another period of solid financial performance.” Clean Harbors has raised its revenue range to 1.86 billion from 1.645 billion, and have increased their EBITA forecast by about 62 million.
Step 4 - Interest Coverage Ratios
Clean Harbors current guidance is $379.5 million from earnings before interest tax and amortization, or EBITA, for the year of 2011. They owe about $ 42.4 million in annual interest expense on the debt, and this strong projected cash balance would provide them coverage better than 8 times over their interest costs. This is a robust ratio, and we like seeing this kind of buffer should the business environment deteriorate. In fact, it is one of the highest ratios of the bonds we have recently reviewed, which includes several AAA rated bonds.
Step 5 - We like companies with lower debt to cash ratio
Clean Harbors reported long term debt of $ 540 million. Cash and short term investments grew to $378 million. Long term debt is more than cash on hand, meaning that while they would be able pay off most to the debt, they would still be short about $160 million if an unforeseen event were to occur. Clean Harbors is one of the very few companies that often profit by cleaning up catastrophes, such as the Yellowstone River oil spill and the large BP gulf oil disaster. Knowing they have such outstanding interest coverage, we believe they have enough cash to pay their current interest expense for about 9 years, well beyond the life of these bonds.
Step 6 - We like companies that have flexible balance sheets
Clean Harbors currently has a market cap of about $2.61 billion, while long term debt is slightly above $540 million. A debt to equity ratio of just above .21 is much lower than we most banks would require, and since the company is only about 20% in debt, this is another very strong positive. If they needed additional funding, they could easily issue new stock.
Step 7 - We like high yields
This issue of Clean Harbors currently has a 5.80% yield to the lowest call in the 8th month in 2014, while the corresponding U.S. Treasury yields 0.65%. Although the credit ratings are different, we believe this large 5.15% spread between the yields is very high given the risks that we can identify. If these bonds are not called at par in 2014, as we expect will occur, the yield to maturity in 2016 would be an even higher 6.475%.
Step 8 - Risks Considerations
Clean Harbors has provided outstanding growth and appears to be very well managed. Although their track record of acquisitions in superb, the examples of Bank of America’s purchase of County Wide Credit or World.com many integration failures reveal the inherent dangers of buying a lemon. Fortunately, having as large a war chest of cash as they have could lessen the potential impact any poor future moves might have. We believe that these Clean Harbors bonds have similar risks, maturities, and yields as the bonds reviewed in "Seagate Technologies 2016 Bond Provides Income From the Clouds," and "American Railcar 2014 Bond."
Summary and Conclusion
This is a very good yield considering the relatively short 5 year time frame, and possibly even shorter if called. Although this Clean Harbors bond doesn't have an investment grade rating, we like it because it offers a higher yield from a company that has the good cash position, solid interest coverage, and wide balance sheet flexibility resulting from a very low debt to equity ratio that more typically can only be found in much higher credit rated companies.
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- CUSIP: 184496AF4
- Coupon: 7.625
- Ratings: Ba3/ BB+
- Maturity: 08/15/2016
- Price$ 104.70
- Yield to Maturity: 6.475%
- Yield to Call: 5.80%
Disclosure: Durig Capital and certain clients currently do have a position in Clean Harbor bonds. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.