U.S. Ecology Inc.: Rising GDP Supports Hazardous Waste Volume

Includes: ECOL, SRCL, WCN, WM
by: Todd Campbell

U.S. Ecology (NASDAQ:ECOL) specializes in the disposal of hazardous waste, a growing business thanks to the economic recovery and industrial production growth. The company's storage and recycling sites keep thousands of tons of hazardous industrial waste out of backyards and water supplies.

In March, industrial production rose 0.8% bringing the measure to 5.9% above this time last year. And, while Q1 GDP decelerated, the economy still grew by 1.8%. Industries producing the toxic byproducts U.S. Ecology handles have seen solid production growth too. In March, for example, chemicals, and plastics and rubber production, rose 3.8% and 7.1% from the prior year, respectively. Energy production is also rising, up 3.5%, and refineries, benefiting from improving crack spreads, are spending again – bullish for hydrocarbon waste volume. Capacity utilization for the manufacturing sector was 75.3% in March, up from 70% year over year; mining utilization rose to 88.1% from 84.1% and chemicals capacity utilization was 78.1%, up from 65.8% during the 2008-2009 low.

All this industrial activity is good for the company's base industrial waste and event-driven regulatory clean-up segments. In Q4, revenue rose 67% to $39.5 million. Once we back out acquisitions, revenue still grew an impressive 38% year over year.

Of this, base revenue rose 22% while event driven sales rose 74%. The total volume disposed of in Q4 was up 83% to 244,000 tons. Post-recession volume and price growth helped gross margins expand to 37.8% from 32.3% in 2009.

For this year, U.S. Ecology is guiding for $0.75-0.85 per share, 9-23% more earnings than 2010. Shares of U.S. Ecology are trading at 16.45x rising 2012 earnings estimates of $1.08 per share, up from $1.02 60 days ago. Given the company's five year PE range is 12 to 32, investors are not yet pricing perfection.

And, the company expanded its reach into Canada and the Northeastern United States when it acquired Stablex last year for $76 million. Stablex, which uses a proprietary chemical to stabilize hazardous materials prior to disposal, brings along 1000 customers and $36 million in additional sales.

All of which suggests hazardous waste disposal volumes and pricing will continue to improve, providing U.S. Ecology with the cash flow needed for shareholder friendly dividend payments. Industrial production growth, a necessary product and a 4.1% dividend yield make U.S. Ecology shares an attractive investment.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ECOL over the next 72 hours.