Clean Harbors Inc. (CLH) is a U.S.-based company which provides environmental, energy and industrial services. This company is managed on a regional basis, offering its services through a network of sales and regional logistics offices and service centers. With incinerators, landfills and transfer stations, Clean Harbors’ disposal assets all together represent one of the largest integrated waste disposal networks in the U.S. Clean Harbors delivers a broad range of services, including end-to-end hazardous waste management, emergency spill response, industrial cleaning and maintenance, and recycling services, operating five service segments: Industrial & Field Services, Oil & Gas services, Technical services, Oil Re-Refining and Environmental service through the recently acquired Safety-Kleen company.
Through its Industrial and Field Services, Clean Harbors provides industrial and specialty services such as high-pressure and chemical cleaning, and industrial lodging services to several industrial facilities. Oil and Gas Field Services provides fluid handling and hauling, as well as production servicing, surface rentals and seismic services, while the oil re-refining segment works processing used oil into high quality base and blended lubricating oils, which are then sold. Technical Services delivers material management services and Environmental segment provides environmental services such as parts cleaning and containerized waste services, among other environmental services.
The company’s recent performance has been rather disappointing, as it faces operational challenges and increased competition. Adjusted EBITDA of $510 million fell below expectations. Nevertheless, Clean Harbors has a stable place in the industry, and its disposal capacity challenges any new player in the field.
Where It Stands
There’s no doubt Clean Harbors Inc. has one of the largest (if not the largest) network of hazardous waste disposal assets in the U.S., generating important returns on invested capital above the industry’s average. These assets represent the main source of the company’s profits, as well as company’s competitive advantages and pricing power in the disposal segment. The particularities of the waste management industry involve the employing of skilled workforce, as well as having large-quantity waste generators on-site, in case of any adverse toxic event. This implies an expensive operational structure which, along with its maintenance easily represents a pressure on overall profit margins.
The recent $1.3 billion addition of Safety-Kleen has been giving some headaches to Clean Harbors, as its profitability is still fluctuant. Indeed Safety-Kleen has a customer network of smaller-quantity waste generators, which represents an interesting addition to Clean Harbor’s previous businesses; however the disparate businesses present an integration challenge to the company’s collection networks. The oil refining segment adds through Safety-Kleen a recycling-oriented service, collecting, treating and reselling used oil. However, profitability is dependent of base oil pricing, parallel which affects cash flow.
Clean Harbor’s extensive network provides competitive advantage, is increasingly difficult to replicate, and the industry’s high entering barriers are likely to discourage any possible threatening competition. Moreover, the capital intensity required to run the facilities limits the entrance to the management disposal industry. Therefore, the company stands in a solid position within the market, and Clean Harbor’s expertise provides strong customer retention rates as well as growth potential, and is likely to allow the company to sustain high ROICs levels over the long term. In addition, environmental regulations are tightening up, making the waste management more expensive. This is likely to increase the demand for outsourcing hazardous waste management.
Following three consecutive earnings misses, earnings estimates have fallen sharply for Clean Harbors during the last fourth quarter. EPS reached 44 cents, and although revenue grew 57%, it yet fell below consensus. Alan McKim, Clean Harbors CEO, said regarding these results, "[W]e enter 2014 with substantial headwinds that have caused us to revise our expectations for the year." Given this negative earnings momentum, most analysts have suggested a strong sell on this stock.
The latest results have set some dark perspective on the company’s figures for the upcoming quarters. Moreover, the mobile workforce deployment is costly, with safety risks, and has an effect over Clean Harbors’ profits. The nature of this industry’s customers is cyclically sensitive, and thus ties the company to its fluctuations. However, and despite the fact that earnings haven’t been reaching the esteemed levels, Clean Harbors is certainly likely to benefit from the increase in industrial production among the U.S., and the rise in hazardous waste volumes. Still, this stock has indeed been underperforming, and analysts coincide saying that if thinking about investing in this management disposal company, better save the effort.
Disclosure: Damian Illia holds no position in any stocks mentioned.