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Friday, July 9, 2010

Can't Pass Up Irreplaceable Assets: US Ecology and Casella Waste Systems

In May we wrote that we continue to track hazardous waste companies such as Clean Harbors (CLH) and US Ecology (ECOL), as well as solid waste services and recycling company Casella Waste Systems (CWST). We previously mentioned that we acquired shares of Casella last November and relayed additional color in February, including our presentation on Alternative Energy from last September.

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):

Second, below we share a wee bit more on Casella Waste Systems courtesy of a management presentation from an investor conference in early June: Bank of America Merrill Lynch 2010 SMID Conference. As a reminder, our summary thesis on CWST in September was as follows (still holds, except numbers have shifted around and are not updated below):
  • 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.

That is, we own Casella Waste Systems as a levered asset play that should benefit from management's strategy to selectively reduce the asset base to repay debt incurred to expand capacity to support long-term waste fundamentals (CWST falls into our "Approach" Caveats Number One and Two). Current and expected U.S. population growth alone should lead to more garbage for Casella's landfills and recycling opportunities for the company.    

Slides from presentation - asset overview:

Improving fundamentals with stable margins:

Delevering plans:

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.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long CWST, ECOL, YHOO.

© 2010 Jeffrey Walkenhorst
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