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Monday, November 2, 2009

Still Not Enough Hazardous Waste -- Keeping Watchful Eye

The slow economy is producing less hazardous waste. While positive for the environment, the situation is negative for hazardous waste remediation companies Clean Harbors (CLH, $56.45) and American Ecology (ECOL, $16.62). In prior posts, we noted that we like the powerful, established franchises of both companies, but remained on the sidelines given key risk factors. Namely, we were concerned that lower volumes and price erosion could result in significant negative operating leverage and diminished near-term earnings power.

Last week, American Ecology reported 3Q09 earnings that revealed still challenging fundamentals:
  • Revenue was $37.5 million (down 9% Y/Y) on "lower transportation related revenue and lower treatment and disposal revenue."
  • "The Company disposed of 201,000 tons of waste in the third quarter of 2009, down 24% from 263,000 tons disposed in the third quarter of 2008."
However, the company still delivered stable gross and operating profit Y/Y for the September quarter. Net income was also virtually flat Y/Y and EPS of $0.23 was unchanged Y/Y and still covers the company's quarterly $0.18 dividend. We find the bottom-line results impressive given Y/Y revenue and volume declines.

Still, the company lowered its 2009 earnings outlook to $0.77 and $0.83 per diluted share ($0.80 midpoint) from $0.85 to $1.00 ($0.925 midpoint) on limited visibility:
  • "With intense price competition prevailing for thermal treatment services, completion of our primary Honeywell Jersey City clean-up project site, stimulus funding ramping slowly and potential delays on both industry and government clean-up opportunities, our ability to project fourth quarter and year end 2009 results has been challenging," Romano commented.
The good news is that American Ecology's return metrics remain favorable and the company's balance sheet is solid:
Clean Harbors reports September quarter results this Wednesday, which will provide another update on the sector. Our preference remains owning companies with current-year growth and large excess cash flow such as American Oriental Bioengineering (AOB, $3.96), j2 Global Communications (JCOM, $20.45), and eBay (EBAY, $22.27) -- please see our prior posts. In the meantime, we will continue to watch fundamentals for American Ecology and Clean Harbors.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long AOB, JCOM, EBAY.

© 2009 Jeffrey Walkenhorst
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