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A Waste Management Giant and Its Recipe for Success

March 26, 2014 | About:

The waste management industry is subject to various environmental, health, safety and transportation regulations on the federal and state levels in the U.S., which present an entry barrier for new competitors. However, for companies who already own the required licenses, operating in this industry brings profitable returns. This is the case of US Ecology Inc. (ECOL), which provides waste management and recycling services to manufacturing, industrial and energy-related sectors. The company’s five waste sites treat hazardous and non-hazardous industrial waste, as well as radioactive and PCB waste. In addition, the company´s Robstown treatment plant in Texas counts with a thermal desorption unit that treats refinery sludge.

In the following sections I will show you that we are dealing with a very profitable growth stock, that has an above average ROE rate of 13.89%, and operates with a net margin of 15.99%.

Holding a Strong Position in the Market

ECOL has two revenue streams. Business contracts to treat customers’ periodic disposal needs on the one hand, and event-driven services that apply to special projects or cleanup work on the other.

Furthermore, the company has a wide economic moat largely stemming from three factors: its efficient scale, its high switching costs and its intangible assets. Of the 20 commercial hazardous-waste landfills operational in the U.S., the majority are run by US Ecology and its main competitors Waste Management Inc. (WM), and Clean Harbors Inc. (CLH). With barriers to entry stemming from regulatory permits, and a limited market size, ECOL has managed to achieve an efficient scale in the market with five hazardous waste-sides. The company’s intangible assets consist of long-term regulatory permits, which enable US Ecology to posses a “gatekeeper privilege” regarding barriers to new entrants. In addition, customer switching costs are high, thus further adding to the firm’s ability to sustain growth in the long term.

Good Investments and New Management Should Ensure Profitable Growth

A range of new treatment services should also help ensure profitable growth for coming years. For example, the Texas facility which operates a new thermal desorption technology for oil refinery sludge since 2008 has been responsible for 10% of revenue and is expected to keep growing.

New management should also ensure expansion and growth opportunities in the near future. The promotion of Jeff Feeler to CEO and Eric Gerratt to CFO, with the guidance of former CEO Steve Romano, has boosted management to achieve higher operating income growth in coming years.

Furthermore, the Stablex acquisition in 2010 demonstrated to be a good investment, and is projected to contribute to ROIC expansion over the long term. This acquisition expanded ECOL’s disposal network with a facility in Montreal and therefore expanded the company’s geographic reach.

A Profitable Future Ahead

Everything indicates that ECOL is a stock with great growth potential and therefore a great investment opportunity. The company’s metrics are significantly above the industry average, and investment gurus such as Joel Greenblatt (Trades, Portfolio) have been buying up shares as of late.

As shown in the following chart, a positive trend in revenue growth and net income over the past years has boosted the ROC rate up to a fair 36.9% rate.

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In addition, the firm’s operating margin rate of 26.32% should ensure ample room for new investments. Furthermore, coming years should be profitable as shown by a revenue growth rate of 23.20%. Also, a solid EPS growth rate of 35.60%, far above the industry median, reinforces my bullish stance regarding ECOL. Hence I feel shareholders will strongly benefit from holding this stock, while those seeking to invest in the waste management industry cannot go wrong with ECOL.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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