Expect Continued Growth And Higher Share Prices From Clean Harbors

seekingalpha11-21

Clean Harbors has a history of steady share price increases, thanks to steady growth of its fundamentals.The waste management company has several initiatives that should ensure the revenue, EBITDA, ...

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Hispanolistic/E+ via Getty Images  Investment thesis As a starting point for identifying attractive growth stocks, I like to see a long steady chart of price increases, such as that of Clean Harbors, Inc. (NYSE:CLH):   CLH 10-year price chart (Seeking Alpha) Sure, there are fluctuations, but on a chart like this such dips can be considered a buying opportunity. Of course, the chart is only a starting point and it’s also essential to check the fundamentals behind the share prices. I believe its fundamentals will continue on the same trajectory and the share price will follow. I rate it a Buy. About Clean Harbors  For a description of the company, what it does, its competitive environment, and unique value proposition, see the Virtual Analyst Report.  Briefly, it is an environmental services company. One of its segments provides environmental services such as collecting, transporting, treating, and disposing of hazardous and non-hazardous waste. Its Safety-Kleen segment recycles and re-refines used oil, manufacturing lubricants, and provides related services. Competitors for Environmental Services, as listed in its 10-K for 2023 include Veolia North America (OTCPK:VEOEY), Enviri Corporation (NVRI), and Republic Services, Inc. (RSG). For Safety-Kleen, competitors include Heritage-Crystal Clean and traditional refineries operated by firms such as Motiva Enterprises LLC and Chevron Corporation (CVX). Here’s how Clean Harbors’ net income margins compare with those of Enviri, Republic, and Chevron (the latter being a multi-faceted oil and gas company:   CLH net income margins chart (Seeking Alpha) Based on its comparative net margin and its leading position in environmental waste services, Clean Harbors likely has at least a medium moat. At the close on November 20, it traded at $247.47 and had a market cap of $13.30 billion. Q3 earnings  Clean Harbors issued its Q3-20224 financial results on October 30; its earnings of $2.12 missed estimates by $0.06 and revenue of $1.53 billion beat estimates by $18.36 million. Overall, it was a positive quarter for the company:  Revenues increased 12% from Q3-2024 to $1.53 billion, with both segments experiencing profitable growth. Net income rose 26% to $115.2 million or $2.12 per diluted share versus $91.3 million and $1.68 per share in the same quarter of 2023. Adjusted EBITDA was up 18% to $301.8 million, compared to $255.0 million last year.  Discussing the results in the Q3 earnings call, Co-Chief Executive Eric Gerstenberg told analysts, “Our financial performance reflected solid year- over-year growth in both segments, but overall was not as strong as we had expected, largely a result of a less favorable pricing environment that affected SKSS.” He also observed that corporate costs were higher, because of acquisition costs, insurance costs, and healthcare expenses. To some extent, those increased costs were offset by cost-reductions and lower incentive compensation. CFO Eric Dugas discussed the situation for both segments. About Environmental Services he said, “we had some challenges in our Industrial Services business, but overall, demand trends for our core business lines continue to be strong.” And for SKSS, or Safety-Kleen, “we were disappointed that the promising Q2 we delivered did not carry over into Q3 as demand began to wane and the typical seasonal strength in summer pricing deteriorated, particularly late in the quarter.” Also, in the Q3 financial results, an increase in free cash flow:   CLH adjusted free cash flow table (Q3 earnings report) From the balance sheet, long-term debt increased from $2.292 billion on December 31 to $2.774 billion at the end of Q3, while cash and cash equivalents went up from $444.70 million on December 31 to $512.37 million on September 30. Growth prospects For context, this chart of revenue, EBITDA, and net income shows how the company has grown those metrics fairly steadily over the past eight years:   CLH revenue EBITDA net income chart (Seeking Alpha) Since 2016, Clean Harbors has been on an upward trend, with a few quarters of regression in two separate time periods. So, it seems quite likely the trend will continue, barring any major setback. We know from the Q3 earnings report the company is in a relatively good position and hasn’t indicated awareness of any headwind that might push EBITDA and earnings down again. As CFO Dugas said on the earnings call, “overall, demand trends for our core business lines continue to be strong”. This year’s growth has benefited from its March acquisition of HEPACO, a competitor that also offers cleanup services. 2024’s initiatives also included Safety-Kleen’s purchase of Noble Oil Recycling on May 1. It also is partnering with Castrol to develop a recycled lubricant called MoreCircular, which provides “a lower carbon footprint”. Going forward, it’s new, state-of-the-art incinerator in Kimball, Nebraska was expected to come online this month and will provide new revenue and net income in 2025. Clean Harbors also expects to benefit from new PFAS (per- and polyfluoroalkyl substances) standards recently issued by the EPA. We should look for more initiatives that stimulate growth in 2025 and 2026 since acquisitions have a prominent place in its capital allocation strategy. This slide comes from the Q2-2024 earnings presentation:    CLH capital allocation slide (company prsentation) No doubt these initiatives helped Wall Street analysts set ambitious targets for EPS in 2025 and 2026:   CLH EPS estimates table (Seeking Alpha) Valuation The 10-year chart in the investment thesis section showed Clean Harbors’ price rising relatively steadily over the past decade. Perhaps because of that steadiness, we may not appreciate how far it has risen: 429.35% in 10 years. Arithmetically, that works out to 42.94% per year, which is an excellent record. That is an average of the full decade, and as a glance at the chart shows, the increase has been more pronounced over the past four years. In the past year ROE has been 17.68% and over the past five years it averaged 15.35% per year. Looking specifically at the one-year increase, we see it is 33.75% greater than the Industrials median. So, this is a stock with a history of vigorous growth. Will that trend continue? The information provided in the earnings call suggests it is likely, based on organic and acquired growth. Fundamentals seem likely to improve, but perhaps the share price will not be as robust. The Wall Street analysts expect earnings for this year to be up 3.48% over last year but looking ahead to they see bigger gains: 14.45% in 2025, 14.63% in 2026, and 17.61% in 2027. But their one-year price target anticipates a more modest price increase, 8.43% to $268.34:   CLH one-year price target chart (Seeking Alpha) We can generate an alternative price target using one of the P/E methods: dividing the current P/E by the forward P/E and multiplying by the current price. However, that produces a price below the current level, because FWD P/E is higher than TTM P/E. Given the positives Clean Harbors has on its side, I think it unlikely the share price will slip in the next 12 months. My inclination is to take the Wall Street analysts’ target increase of 8.43% and bump it up to 10.00%. That would see the share price rising from the current $247.47 to $272.22 in one year’s time. I’m optimistic about Clean Harbors and its share price, and rate it a Buy. One other Seeking Alpha analyst has provided a rating in the past 90 days, also a Buy. The Quant system rates it a Hold, while Wall Street analysts have a collective Buy, based on seven Strong Buys, four Buys, and two Holds. Risk factors Analysts’ assumptions and interpretations, including mine, may be wrong and lead to the wrong conclusions. It’s possible we are being too bullish about Clean Harbors’ growth and future price increases. New technologies may change the way environmental wastes are handled, which could lessen demand for the firm’s services and lead to lower revenue and earnings. Handling hazardous materials is inherently unsafe and mitigating that risk is essential. Any failure could lead to loss of health or life for its employees, and in turn, lead to reputational and financial losses. Clean Harbors reported in its 10-K for 2023 that it has recorded liabilities of $229.8 million in connection with certain acquisitions. Each new acquisition has the potential to add to that amount. The company must maintain significant insurance or other sureties for the closure and post-closure care of its hazardous waste treatment facilities. Accessing suitable insurance, at a reasonable cost, could become a problem. Conclusion Behind the steady, upward growth of Clean Harbors’s share price is steady, upward growth of its fundamentals. The company has a history of profitable growth, and it appears that trend will continue. The company has initiatives that should produce both organic and acquired growth.  With growth of the fundamentals, the stock price should also continue rising. Because of that, I rate it a Buy.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485141877"}