US Ecology Inc. (ECOL), formerly known as American Ecology Corporation, is a waste management company which operates five hazardous-waste sites in the U.S., along with non-hazardous waste services as well to commercial and governmental customers. As their landfill situated in Richland, Wash., is permitted to accept radioactive waste, the company’s primary customers are in the industrial, manufacturing and energy-related sectors. US Ecology operates moreover through its subsidiaries, such as US Ecology Nevada Inc., US Ecology Washington Inc., US Ecology Texas Inc., US Ecology Idaho Inc. and US Ecology Field Services Inc. They provide services to steel mills, medical and academic institutions, refineries, chemical manufacturing facilities and the nuclear power industry. It works through two business segments: operating disposal facilities and non-operating disposal facilities.
This company isn’t indeed one of the largest in the industry, especially compared to peers Waste Management (WM) and Clean Harbors (CLH); however, its strategy of driving volume toward its landfill assets has led the company to see high profit margins. Working through contracts with industrial waste generators as to manage their disposal needs, US Ecology receives a steady stream of revenue. Still, their special event-driven, projects or cleanup work segment is the most cyclical and has a material effect on the top and bottom lines, representing approximately 40% of revenue. The recent annual report showed strong financial results, with revenues increasing 19% year over year, and base business increased 7%, primarily due to higher average selling price and volume growth.
Hazardous-waste market is growing in the U.S., and the business opportunities for companies such as US Ecology increase. US Ecology has focused on reinvesting its operating cash flow into assets as to broaden the core disposal business, while generating higher returns on assets. In this sense, new acquisitions and expansions have been made in order to enhance the company’s disposal network improving transportation flexibility as well. The acquisition of Stablex in Montreal, Canada, in 2010 and Dynecol’s treatment and transfer asset in Detroit, during 2012, expanded the company’s network beyond its core western sites and increased transportation capabilities as well. Furthermore, US Ecology has been investing on services that offer customers a variety of hazardous waste treatment options. The services provided by their thermal desorption technology that treats oil refinery in Texas has grown quickly to represent 10% of overall treatment and disposal revenue. This new services, despite comprising a more competitive environment, provide the opportunity to draw new customers towards US Ecology’s core business.
Over all, the company’s strategy of expansion and investment is likely to increase selling opportunities and add operational leverage, supporting a long term margin expansion for the company.
The hazardous-waste industry has indeed high barriers to entry. The complexity of the process to obtain the rights to construct and operate these facilities, in addition to the costs and time needed to generate significant tangible assets, make this industry’s infrastructure hard to replicate, keeping the number of competitors rather stable. US Ecology operates four of the twenty landfills in the US and Canada, and manages a fleet of 234 gondola railcars and three rail transfer stations.
Even though the hazardous waste market isn’t big, and its growth potentiality is limited, US Ecology has several competitive advantages: expertise and intangible assets, efficient scale, and high switching costs. US Ecology operates in a highly regulated environment as landfills cannot operate without regulatory permits. Therefore, these companies require in order provide their services both significant expertise and long-lasting regulatory permits. These make valuable intangible assets which secure the landfill owner’s privileges, by limiting the number of disposal sites a customer may access.
Moreover, this industry has high switching costs as it is dependent of waste generators. Having an efficient and stable relationship between waste generator and disposer is essential for the business. US Ecology provides customers with both disposal and safe transportation, and their rail assets provide customers cost effective waste handling, adding benefits of administrative relief and risk mitigation. Given the highly regulated and hazardous nature of this industry, customers rarely switch to a cheaper company, and tend to hold onto their proven and reliable firm. Therefore, the company is likely to sustain its pricing power and continue to drive strong ROICs.
There is no doubt environmental liability always remains a concern with any company that operates in a highly regulated industry. In order to protect against the risk of an environmental disaster, these companies have a broad range of insurance coverage. Even though these costs do not weight significantly in the company’s margins, the potentiality of increased expenses in the future are always a threat. The main concern with US Ecology seems to be the volatility of event-driven revenues. This economically sensitive segment raises the uncertainty regarding the company’s performance, as the reduction in the amount of special waste projects might lead to a significant decline on revenues. Moreover, the thermal desorption segment, while fast growing, holds some risks as involves a more pricing-sensitive environment.
Despite the fact that this industry carries always some levels of risk, US Ecology benefits from strong competitive advantages in a niche market. An upturn in industrial production will increase volume in hazardous-waste, and the quick growth of the thermal desorption market is likely to raise revenues as well. Even though some analysts think US Ecology faces some uncertainty regarding its revenue growth, most analysts are feeling bullish about this stock, and suggesting it might be interesting adding this smaller size stock to a long-term portfolio, as its flexibility and growth opportunities are expected to provide positive economic profits over the long term.
Disclosure: Damian Illia holds no position in any stocks mentioned.