Patient Investors Could Clean Up

 | Jun 14, 2013 | 12:00 PM EDT  | Comments
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Stock quotes in this article:

clh

,

wm

Famed money manager Peter Lynch would love Clean Harbors (CLH). It is the leader in hazardous waste disposal, which is an ugly business that receives little media coverage or attention from investment analysts. However, it has provided decades of outstanding growth for this well-run company.

Clean Harbors serves the majority of the Fortune 500 and helps them dispose of the hazardous byproducts produced by their businesses, which include industrial operations, energy production and chemical manufacturing and are deemed hazardous by the state or federal authorities. It owns and operates 70% of the hazardous incineration capacity in the U.S.

The company is probably best known for its work in helping clean up the massive oil spill in 2010 but its main business in helping thousands of businesses dispose of their hazardous waste on a daily basis. The stock has not participated in the rally so far this year as it has had a few hiccups digesting the largest acquisition in its long history. However, this recent poor performance is giving patient, long term investors a great entry point to start to build a position in this wonderful niche business.

Valuation

CLH is now selling near the bottom of its five-year valuation range based on the price-to-sales ratio (P/S), the price-to-book ratio (P/B) and the price-to-cash flow ratio (P/CF). Despite being in what some would call a mundane business, Clean Harbors has managed to grow revenue at an average 20% clip over the past five years. As the company integrates its recent acquisition, I believe that it will resume its solid growth path. Earnings are projected to ramp up nicely over the next few years. The company made $1.88 a share in fiscal 2012 but is marching to around $2.75 a share this fiscal year; the consensus earnings estimate for fiscal 2014 is for around $3.33 a share.

Major Acquisition

Late last year, Clean Harbors made its largest acquisition ever when it acquired Safety-Kleen for just over $1.2 billion. Safety-Kleen is a premier provider of used oil collection, re-refining, parts cleaning and other environmental services. This expanded the company's reach by giving it access to about 200,000 small businesses like auto mechanics and smaller factories that it did not have exposure to before. This acquisition greatly expands Clean Harbors' revenue base and should lead to other opportunities.

One possibility would be using Safety-Kleen's recycling expertise to offer other services to the oil services firms Clean Harbors already serves. Safety-Kleen's technology could be deployed to recycle the vast quantity of liquids that are used in their operations.

Summary

I am going to be building a position in Clean Harbors over the next few weeks because I think its recent underperformance is temporary. The stock is selling at the same forward price-to-earnings ratio (P/E) as industry heavyweight Waste Management (WM) but is growing both its earnings and revenue at a much faster clip. I have every confidence that it will get its Safety Kleen acquisition incorporated successfully into its operations over time and that this will provide additional growth opportunities.

In an increasingly stringent environmental and regulatory environment, Clean Harbors is well positioned to continue to deliver solid results in this mundane business for years to come.

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