Clean Harbors: An Attractive Play On Waste

Summary

• Clean Harbors has built its business around taking care of hazardous and non-hazardous waste.
• The company looks set to continue growing its business at a nice clip and generating attractive cash flows for its shareholders.
• Add on to this the fact that shares look cheap and it's hard to pass up.
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Waste disposal is one thing, but an entirely different market that is even more specialized is hazardous waste disposal. Few publicly traded companies focus on this niche, with one of the leaders in the market being Clean Harbors (NYSE:CLH). In recent years, the company has exhibited attractive growth on both its top and bottom lines. Revenue is negatively affected by the COVID-19 pandemic, but growth has continued this year. Add in some recent acquisitions the company has made, as well as other investments, and the future of the enterprise looks bright. On top of this, shares of the business look to be trading at levels that are quite cheap. Add all of this together and you have a quality operator that could make for a good long-term prospect.

A niche player

At this time, Clean Harbors operates as a major hazardous waste disposal company in North America. It focuses on things like the collection, recycling, and re-refining of used oil. It does all of this through the more than 450 service locations catering to the over 300,000 customers and with the more than 10,000 company vehicles spread across its network. The company targets a few key markets. One of these is the $11 billion hazardous waste management space. It is also engaged in the $14 billion remediation and industrial services market and in the $15 billion US lubricants industry.

*Taken from Clean Harbors

The company has its operations split between two key operating segments. The largest of these is called Environmental Services. This accounts for nearly 85% of the company's overall sales. Through the segment, the company engages in the collection, transportation, treatment, and disposal of both hazardous and non-hazardous waste. This particular segment also includes the company’s CleanPack services. Through this, it takes care of laboratory chemicals and household hazardous waste.

The other segment the company has is called Safety-Kleen Sustainability Solutions. This accounts for the remaining 15% of sales and it involves providing services to automotive repair shops, car and truck dealers, metal fabricators, and other related companies. Through the segment, the company provides parts cleaning services, machine cleaning services, and the maintenance, disposal, and replacement of related fluids. It then utilizes any used oil that it collects to manufacture lubricants for various retailers and other end users.

In recent months, Clean Harbors has been busy engaging in some different activities. Earlier this year, for instance, the company announced the purchase of assets owned by Vertex Energy (VTNR) for $140 million. These particular assets include used motor oil collection and re-refining operations. Collectively, these assets are expected to generate $100 million in annual revenue and about $15 million in EBITDA. It is unclear whether any synergies would be generated from this purchase, but the fact that it adds 90 million gallons of annual production capacity to its oil business suggests that synergies are likely.

An even more significant acquisition was of HydroChem PSC. That business operates as an industrial cleaning, specialty maintenance, and utilities services firm. This deal was far larger, costing the company $1.25 billion. Based on 2020 estimates, sales for this purchase should total about $744 million. The company should initially generate EBITDA of $115 million, but after the first full year of ownership, management is expecting additional synergies of $40 million. On top of the steel, the company is also investing around $180 million on a 130,000-ton hazardous waste incineration project. Specifics on how profitable this investment will be have not been provided.

In the years leading up to the COVID-19 pandemic, revenue generated by this company has been consistently growing. Revenue in 2016 totaled $2.76 billion. This increased each year, climbing to $3.41 billion in 2019. But then, in 2020, sales declined slightly to $3.14 billion. Fortunately for investors, this drop was short-lived. In the first nine months of 2021, the company generated sales of $1.74 billion. That represents an increase of 10.6% over the $1.57 billion the company generated the same time last year.

*Created by Author

Revenue took a slight step back in 2020, the same cannot be said of profitability. EBITDA to the business expanded every year over at least five years, climbing from $410.8 million in 2016 to $573.8 million in 2020. Operating cash flow followed a similar path, rising from $259.6 million to $430.6 million. When it comes to net profits, however, the company has been a bit more volatile. This can be seen in the chart above. But it is important to note that 2020 was the high mark for the enterprise, with profits totaling $134.8 million.

*Created by Author

This year, profitability has been really impressive. EBITDA in the first nine months of this year totaled $317.2 million. That represents an increase of 20.1% over the $264.1 million generated in the first nine months of 2020. Operating cash flow followed a similar path, climbing from $173.5 million to $265.4 million. And net income jumped from $40.6 million to $88.8 million. Management has provided some guidance for the current fiscal year. At the midpoint, the company expects to generate operating cash flow of around $500 million and EBITDA of $635 million. Net profits, meanwhile, should be around $176 million.

Shares are cheap today

This makes pricing the company rather simple, but it is important to note that these estimates came out before the company announced its recent acquisitions. So because of this, I decided to look at it from two different perspectives. One is through the lens of current expectations provided by management, incorporating the recent purchases the company has made. And the other incorporates projected synergies from the largest of these transactions. I assumed a 21% effective tax rate and used the higher of the interest rates the company is paying on its debt today. I also assumed that the company would use $300 million of its cash on hand to facilitate its purchases, while utilizing debt for the rest of the deal costs. This will still leave the company with $366.26 million in cash on hand.

Company	Price / Operating Cash Flow	EV / EBITDA
Quest Resource Holding Corp (QRHC)	16.4	20.8
Heritage-Crystal Clean (HCCI)	9.6	8.5
SP Plus Corporation (SP)	18.2	N/A
Republic Services (RSG)	16.4	18.0
Tetra Tech (TTEK)	32.6	33.1

Click to enlarge

Based on my calculations, using the more conservative approach, I figured that the company is trading at a price to operating cash flow multiple of 11. The multiple is the same if we use the EV to EBITDA approach. If we look at the more liberal scenario, where we incorporate projected synergies and factor in taxes, these multiples drop to 10.4 each. To put this all in perspective, I then compared the company to the five highest-rated of its peers as defined by Seeking Alpha’s Quant platform. On a price to operating cash flow basis, these companies ranged from a low of 9.6 to a high of 32.6. Only one of the firms was cheaper than our prospect. Using the EV to EBITDA approach, I ended up with a range of 8.5 to 33.1. Once again, only one company was cheaper than Clean Harbors.

Takeaway

At this moment, I am convinced that Clean Harbors is a quality company. The recent acquisitions the business has undergone complicate the picture a little bit. But on the whole, the company appears to be a great firm for long-term investors. Operationally, I suspect it would do very well down the road. In addition to this, shares of the company look cheap on both a relative basis and on an absolute basis. Because of this, I fully expect the company to be a solid opportunity for investors who are value-oriented.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.