Cleaning Up On Clean Harbors (CLH)

Who do you call when a disaster—natural, or human caused—wreaks environmental havoc?  In the case of Hurricane Katrina, or the BP oil spill, the answer is waste management firm Clean Harbors (CLH).  In a world where climate change is already causing more powerful and more frequent storms, and where higher risk hyrdrocarbon extraction methods are now economically viable and necessary, Clean Harbors represents a low risk, high potential investment.  In this article, we will first address what Clean Harbors does, why it is a low-risk stock, and then why there is high potential for future earnings growth.

 

Clean Harbors has two parts to its business; it is one of the largest environmental services firms in the United States, and the largest provider of non-nuclear waste disposal services.  The company serves over 50,000 customers, and operates in 36 states, as well as Canada, Mexico, Puerto Rico, Bulgaria, China, Sweden, Singapore, Thailand, and the UK. 

 

As Clean Harbors operations are varied, somewhat complex, and not high profile in the same way as a consumer electronics company, there are two slides from the corporate presentation that are helpful in explaining exactly what the company does:

 

These standing industrial and environmental services that Clean Harbors offers to its 50,000 clients—which include many Fortune 500 companies like Dow, Bayer, BP, Johnson and Johnson, Union Carbide, General Dynamics, Shell, Albian Sands, Devon, Petro-Canada, etc., form the basis for a $2.6 billion market capitalization with 26 million shares outstanding, on 2010 revenues of $1.73 billion, and an EBITDA of $315 million.  As of Tuesday, April 26, 2011, CLH closed at $97.15 per share.  This two-part business is extremely stable, being diversified through many different industries, as the following slide (also from the corporate presentation) shows, and unlikely to face competition in the near future.

Management estimates that the cost of replicating Clean Harbors’ network of waste management facilities and transportation vehicles is around $2 billion—clearly waste management is a costly industry to enter.  Additionally, as there have been no new landfills permitted in the past 16 years, and no new incinerators built in the past 14, it is even less likely that Clean harbors will face new competition. 

 

Added to this, Clean Harbors is expanding.  In the past few years, the company has spent $500 million making strategic acquisitions to expand its geographic reach; Teris, Ensco Caribe, Romic, Universal Environmental, EnrivoSORT, and Eveready.  These acquisitions have allowed the company to expand operations into Puerto Rico, the Northwest, Southwest, and West Coast of the United States, and Western Canada.  It has also entered the recycling services market by purchasing two recycling facilities from Safety-Kleen in 2008.  It’s industrial services, and commercial waste management business is industry diversified, and stable. 

 

Furthermore, Clean Harbors is expanding.  In the past few years, the company has spent $500 million making strategic acquisitions to expand its geographic reach; Teris, Ensco Caribe, Romic, Universal Environmental, EnrivoSORT, and Eveready.  These acquisitions have allowed the company to expand operations into Puerto Rico, the Northwest, Southwest, and West Coast of the United States, and Western Canada.  It has also entered the recycling services market by purchasing two recycling facilities from Safety-Kleen in 2008.

But what makes the company an investment with high potential?  As evidenced in the above chart, rising revenues and profits, with steady profit margins show that the company has been able to integrate these acquisitions into its existing business at little to no cost.  From 2006 to 2010, revenues increased from $829.81 million to $1,731.24 million (108.63%), and profit rose from $244.97 million to $520.5 million in the same period (112.47%).  In the past year, revenues have risen from $1,074.22 million—a 61.16% increase—and profit from $320.74 million—a 62.28% increase. 

 Much of this rapid growth is attributable to the role Clean Harbors has played in the aftermath of the BP oil spill.  The effect of the spill on Clean Harbors’ environmental management business is quite evident.  EPS went from $0.36 in the second quarte3 2009 to $2.20 in second quarter 2010, and from $0.54 in third quarter 2009 to $1.47 in third quarter 2010.  Since April 20, 2010, the date of the spill, the stock has risen from $61.32 to $97.38, as of close April 26, 2011, hitting an all time high of $106.61 on April 6.

 

Now I am not hoping for more environmental or human-caused disasters—but we are heading into hurricane season. Furthermore, the price of oil has made it economically viable and necessary to engage in higher risk extraction methods—something that has already made Clean Harbors’ field services a necessity, and may well do so again in the future. Because it is impossible to predict weather and other environmental disasters, it’s hard to argue that any future event is priced into the stock.  In fact, CLH is trading at a lower P/E than the industry average—19.7 vs. 23.2.

 

Consensus on earnings for May 4, 2011 is $0.65, but the company has beat expectations the last three quarters.  I see CLH as a long-term investment opportunity, with possible entry after a positive earnings report, or a sustained breakout above its high of $106.61.

 

 

 

 

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.