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Tuesday, February 23, 2010

Waste Management Companies: Bandwagon Coming Around, Especially for CWST

Readers know that we've been tracking hazardous waste companies such as Clean Harbors (CLH) and American Ecology (ECOL) over the past year. We also previously mentioned Casella Waste Systems (CWST - solid waste services, not hazardous) and that we acquired shares last November.

The entire waste sector is now garnering more attention as the Market fixates on large ownership positions held by Berkshire Hathaway (BRK-A, BRK-B) and Bill Gates. For example, Berkshire Hathaway increased its position in Republic Services (RSG) in the December quarter -- various media reports covered the increased exposure, including this Forbes article. Of course, it's never a bad idea to own a well-positioned, difficult-to-replicate business -- at the right price -- that provides a necessary service that will always be around.

Last summer, we conducted research on the global energy and "clean tech" markets, including waste services. We presented our findings along with select long/short investment ideas in a September presentation to a hedge fund focused on these areas.

Casella Waste Systems, then at $2.60, was one of our recommendations. Today, the bandwagon is hopping on board -- give a look at all of the current headlines under CWST on Yahoo! Finance (YHOO):
  • Waste Management Hauls In Cash at Investopedia (Fri, Feb 19)
  • Strategist: Invest Like Buffett-With Garbage! at CNBC(Thu, Feb 18)
  • Buffett the Trashman CNBC(Thu, Feb 18)
  • Casella Waste Systems, Inc. Reschedules Conference Call on Its Fiscal Year 2010 Third Quarter to Accommodate Investor Interest Marketwire(Thu, Feb 11)
  • Your Very Own Templeton Basket at RealMoney by TheStreet.com(Tue, Feb 9)
  • Casella Waste upgraded by Wunderlich Briefing.com(Tue, Feb 9)
  • The Waste Management Dividend Play at Minyanville.com(Mon, Feb 8)
Our summary thesis on CWST in September was as follows:
  • Casella Waste Systems (CWST) – share price is up 5x from March lows, yet well below a 52-week high of $14.49 last September; levered 4.8x TTM EBITDA, but multi-year investment cycle to expand landfill capacity (now ~30 years) and modernize treatment (gas-to-energy and sorting) are complete; management pulling levers to improve free cash flow and reduce debt (e.g. higher pricing, cost controls) despite challenged fundamentals; potential positive catalysts include bottom-line improvement from pricing initiatives and value recognition of North Eastern landfill assets; CWST trades at an EV/EBITDA of 5.4x and P/S of 0.12x compared to RSG at 9.6x and 1.6x, respectively – company reports results 9/2/09.
Now at $4.77, Casella still remains inexpensive on a comparable company basis, but -- unlike larger companies such as Republic or IESI-BFC Ltd. (BIN) -- the company is a delevering story with a lower margin profile and no near-term potential for a dividend. That said, we think shares remain attractive for patient investors.

Our full presentation from September is below (available for download here) and includes substantial data on global energy trends as well as commentary on the "clean tech" sector. We hope you find the contents interesting.


Happy investing,

Jeffrey Walkenhorst
CommonStock$ense

Disclosure: long CWST, BRK-B, YHOO.

© 2010 Jeffrey Walkenhorst
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1 comment:

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