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Sunday, May 2, 2010

Now Enough Hazardous Waste? Maybe. Over Long-Term, Certainly.

We continue to track hazardous waste companies such as Clean Harbors (CLH) and US Ecology (ECOL - formerly "American Ecology"). We also previously mentioned Casella Waste Systems (CWST - solid waste services, not hazardous) and that we acquired shares last November. Also, in February, we shared our presentation on Alternative Energy from last September.

In our view, all of these companies own/operate near-impossible-to-replicate franchises. In fact, with a long-term investment horizon, we suspect investments at current levels would yield reasonable total returns over time -- similar to Berkshire Hathaway (BRK.A, BRK.B) paying a seemingly high multiple for Burlington Northern (BNI) (*acknowledge debate around this move, articulated here by First Eagle's Bruce Greenwald). Still, we've shied away away from the hazardous waste companies primarily because of our concern that negative fundamentals would compound negative operating leverage in the downturn and pressure shares downward.

Yet, timing entry points is extremely difficult and, while maintaining price discipline, we can't get "too cute" once we decide we like the business and the business is already trading at a discount to our estimate of normalized intrinsic value.

Example: shares of Clean Harbors leaped higher to the mid-$60s from the mid-$50s over the past week on speculation that the company might benefit from the unfortunate gulf oil catastrophe (Clean Harbors offers oil spill containment and clean-up services). Even in the $60s, we believe normalized earnings power and replacement cost analysis support much higher fair values for the company, providing reason to purchase shares despite questionable fundamentals. Further, as we've previously noted, we generally prefer to own services companies over pure commodity companies (e.g. own clean-up/remediation versus natural gas/oil companies).

Clean Harbors reports results this Wednesday, so we'll have an update on utilization levels, pricing, and overall demand. US Ecology reported March quarter results last week, including this management commentary (emphasis added):
  • "Our overall business was similar to what we saw in the fourth quarter of 2009, although we experienced declines when compared to the first quarter last year," commented Chief Financial Officer, Jeff Feeler. "As expected, our Event Business was impacted as a result of the completed Honeywell Jersey City project. We estimate that the Honeywell Jersey City project contributed approximately $0.06 per share of earnings in the first quarter of 2009 that was not replaced in 2010. Our non-Honeywell Event business revenue was up almost 18% as compared with the same quarter last year. However, our Base business, while relatively flat with the fourth quarter, was lower than the same period last year consistent with the lag in our business to industrial production levels," Feeler concluded.
The up-tick in event business (ex-Honeywell) is encouraging, although the "base" business was still down Y/Y. Additional color from the US Ecology's 1Q10 slide deck:

And, the business outlook:

Common sense implies that a stabilized and now growing economy, even if slowly, is positive news for both US Ecology and Clean Harbors. While pricing may remain competitive, the tide may be turning.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long CWST, BRK.B.

© 2010 Jeffrey Walkenhorst
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  1. If you feel that way about service companies, you should check out NE and ESV (offshore drilling service companies). They are competitors Transocean (of the sunken Horizon rig) and have been hit pretty hard, although they are both running their companies quite well. ESV is paying down most of their debt and just increased their dividend from 10 cents to 1.40. There may be room for more downside as we continue to see ugly headlines in the next month, but you should check them out!



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