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Getting Dirty with Fundamentals – Waste Industry Offers Intriguing Value: American Ecology (ECOL) and Clean Harbors (CLHB)

October 22, 2008 | About:
Joseph Kunkle

Joseph Kunkle

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If “one man’s trash is another’s treasure”, a scan of the waste management industry returns a list of 10 discarded, forgotten stocks that have treasure potential. After digging through the 10 stocks that compose this group, American Ecology (ECOL) looks like the standout in the group, with a PEG near 1, very high management efficiency ratios, ZERO debt, strong margins, and an excellent balance sheet. This is the type of stock that should be in every investor’s portfolio. Many of the stocks in this group have outperformed the broader market this year, with Allied Waste (AW), Clean Harbors (CLHB), American Ecology (ECOL), Waste Connections (WCN), Stericycle (SRCL), and Waste Management (WMI) all exhibiting long term up-trends. The waste industry has very high barriers to entry due to government regulation and large capital expenditures. The industry is also benefitting from increased regulation from government environmental agencies, which stabilizes prices and leads to more companies outsourcing waste disposal. Some of the companies specialize in the cleaning and recycling businesses, while others are your everyday garbage men. The most booming segment is the management of hazardous waste, an area where American Ecology (ECOL), our featured stock, and Casella Waste (CWST) specialize. Even in an economic slowdown, waste management is the ultimate recession proof business, and as more nations around the globe industrialize, there will be continued growth in the sector. Strong cash flow growth and a high quality of earnings makes these stocks very good investments for the passive type. Looking at a compilation of fundamental data (See Table Below, stocks in green pay dividends), Allied Waste (AW) looks cheap on a sales and book value basis, but growth is a concern, while margins remain strong. Clean Harbors (CLHB) has been the second best performer of the year, benefitting from the increased activity in the rail and oil sectors, and is also trading at a bargain level that is tough to ignore. Another positive for this industry is the recent “merger gone wrong” among Republic Services, Waste Management, and Allied Waste. This is just the beginning of things to come; the larger players will be heavily shopping for smaller value companies that can add diverse business lines and fuel growth (Heritage Crystal Clean (HCCI) and Perma-Fix (PESI) did not make the screen, but are two micro caps worth a look). A company like Stericycle (SRCL), the major player in medical waste management, would make a great acquisition target as a high growth/high margin asset. All in all there are many reasons why waste management stocks can continue to outperform, and in this market that has been stricken by “bad assets and garbage balance sheets”, it is a very fitting industry to bring us out of this mess. “Haste makes waste”, but in this scenario swift action is necessary to be buying these waste companies at bargain levels, before the big money recognizes the potential, and American Ecology has star-power in this industry.

Ticker

Forward P/E

PEG

P/S

P/B

EPS growth past 5 years

Sales growth Q/Q

ROA

ROE

Current Ratio

LT Debt/Equity

Operating Margin

Performance (Year)

AW

9.76

2.03

0.73

1.09

2.76%

2.25%

2.66%

9.46%

0.56

1.5

17.52%

-18.12%

CLHB

19.52

1.4

1.41

3.5

28.93%

11.12%

6.57%

19.27%

2.03

0.13

9.97%

28.77%

CWST

23.41

0.35

1.58

0.85%

6.31%

-0.49%

-3.17%

0.97

4.39

7.53%

-42.44%

ECOL

18.19

1.13

2.74

5.35

1.57%

7.87%

17.98%

25.31%

2.59

0

19.40%

35.01%

RSG

12.11

1.4

1.35

3.44

9.54%

2.36%

5.93%

20.07%

0.68

1.2

15.46%

-25.77%

SGR

5.88

1.61

0.23

1.11

29.35%

13.60%

1.92%

4.93%

1.37

0.84

4.15%

-71.30%

SRCL

28.08

2.19

4.72

7.16

21.03%

19.30%

8.20%

19.24%

1.31

1.05

23.16%

8.46%

WCN

19.36

1.51

2.57

2.81

11.11%

10.76%

5.23%

12.84%

0.82

0.87

20.99%

8.00%

WMI

12.75

1.47

1.15

2.72

10.89%

3.90%

5.70%

19.44%

0.93

1.39

16.89%

-13.96%

WSII

15.95

33.5

0.61

0.81

-43.05%

7.42%

0.51%

1.32%

1.24

1.1

10.41%

-23.78%

About the author:

Joseph Kunkle
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 2.8/5 (4 votes)

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