Here, we share two things. First, we recently dipped our toe into US Ecology, unable to resist a company with irreplaceable assets, a debt free balance sheet, a 5% plus dividend yield, and trading near a five year low with stabilizing fundamentals - from Yahoo! Finance (YHOO):
- 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.
Improving fundamentals with stable margins:
Where would CWST trade assuming reversion to the mean?
With economic concerns again taking center stage, CWST is now back at $4.03 following a run to $5.00 and despite improved operating results and incremental progress with asset sales announced on 7/6/10. While we typically prefer lower debt levels and large, consistent free cash flow generation, we think the company is moving in the right direction and expect patient investors should see increased free cash flow over time. As this occurs, mean reversion is ever more likely, in our view.
Disclosure: long CWST, ECOL, YHOO.
© 2010 Jeffrey Walkenhorst
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