American Ecology Corp.: Canned heat
If there is hazardous waste to care of, give American Ecology Corporation (Nasdaq: ECOL) a call. The company will take the deadly mess, treat it, can it up tight and bury it deep in the desert. It will never be heard from again.
American Ecology has lots of people in big baggy white suits and helmets neutralizing waste in huge stainless drums with giant mixers. They make low-activity and low-level radioactive wastes disappear and do the same with PCB-tainted material. The company has put a lot of money in the past couple of years into expanding its infrastructure, buying railcars and laying track to bring toxic goo to certain company sites. And it’s increased its storage capabilities.
All the more to continue to grow on. Third-quarter revenue through September was up 44% to $39.4 million, operating income up 41% to $6.6 million and net income up 51% to $4.5 million, or at $0.25 per diluted share. This is a volume business, and American Ecology in the third quarter disposed of 269,000 tons — 55% more than the same quarter a year ago — at three remote locations: its Idaho, Nevada and Texas waste facilities. The resulting operating leverage drove quarterly gross profit to $10.3 million in the third quarter of 2007, a 49% increase.
The company is on pace to get rid of one million tons of contaminated refuse in fiscal 2007 — a record. It raised expectations for fiscal 2007, increasing earnings per share guidance to $1.02 to $1.05, up from $0.98 to $1.02, and will initiate 2008 guidance in February, when it releases fiscal 2007 results. With the expanded capacity and lower capital spending expected in next year, volumes and earnings should continue to rise.
Boise, Idaho-based American Ecology has two business segments: base business and event work. Base business recurs as a company puts out sordid fare as a side serving of its business. About 3.5 million tons of hazardous wastes are produced each year, a fairly static market. Event work is harder to predict but is expected to grow as the government focuses on mopping up the environment.
The major base business source is Honeywell International Inc. (NYSE: HON), which provided 38% of American Ecology’s revenues in 2006. Under a waste disposal contract, Honeywell is expected to ship 1.2 million tons of waste to American Ecology’s Grand View, Idaho facility through November 2009.
The company also has some recurring business with the Army Corps of Engineers, but believes demand hinges more on general economic conditions and clean-up projects. It says in its annual report that delivering specialized niche services (such as its own rail cars) while aggressively competing for large volume clean-up projects and non-specialized commodity business, will continue its success. American Ecology leases and owns more than 700 gondola and hopper cars, and uses modern packaging, shipping and 24-hour tracking technology. “Our team knows where every load of waste is at any time,” the company says on its website — an excellent motto.
The largest piece of revenue — 52% in 2006 — comes from event business. Handling waste is tricky business itself; the need to rely on events is riskier still. The company can’t control the funding for it, and can’t predict when and what will arise. Projects can be delayed by funding restrictions, changes in laws and regulations, public controversy, litigation, weather and other factors. Quarter-to-quarter and year-to-year revenues and profit swings are part of this turf.
Regulatory oversight and the impact of regulations on a company’s expansion plans are key to this industry. That’s why far-flung western locations are attractive — there is good dirt in which to bury the unwanted, and there aren’t many neighbors around, as there are in eastern areas. Speaking at an investor conference in early November, American Ecology CEO Stephen Romano noted in particular the company’s Grand View, Idaho, site, saying the company has been able to build capacity as needed, get permits and increase throughput.
But neighbors in nearby states are getting nosy, if not downright ornery. A citizens group in Utah organized against EnergySolutions, Inc. (NYSE: ES) when it put a plan before state regulators to increase the size of its low-level nuclear waste landfill outside of Salt Lake City. EnergySolutions, which completed a $690 million IPO in mid-November, dropped its expansion plan after a deal was made with Governor Jon Huntsman Jr.
When asked about the regulatory atmosphere, what happened in Utah and how it all may affect American Ecology’s plans, Romano told SmallCapInvestor.com: “Whatever happens with one company in one state has very little to do with what goes on in another state.” Romano, who has worked in regulatory capacities, said American Ecology is focused on growing its hazardous waste and radioactive waste businesses, and that he is optimistic about 2008.
Neighbors may stress, but many like it hot. American Ecology, with a $406-million market cap, is up against tough competition. Rivals in hazardous waste disposal include Waste Management, Inc. (NYSE: WMI) and Clean Harbors, Inc. (Nasdaq: CLHB). Competition in radioactive material disposal is the aforementioned EnergySolutions and Waste Control Specialists, LLC. There is a high barrier of entry into the industry, thank goodness, particularly considering the highly regulated nature of the business, thank goodness again.
Through it all, American Ecology is a success. At Wealth Monitors, analyst Tyson Bauer said in a note after third-quarter results that he expects 2008 earnings-per-share guidance of $1.12 to $1.17, reflecting American Ecology’s internal goal of 15% operating income growth. He said the company is getting keener on acquisitions, and these, although likely, will not be included in the guidance range. American Ecology has no debt.
“An ECOL investment should consistently provide a total investment return of 15% or greater annually even in poor economic times as oil and GDP conditions are not as important as
unending litigation and government regulations regarding environmental issues,” Bauer wrote. He termed the company a defensive investment; its dividend yield was 2.7%, based on Tuesday’s close at $22.24 per share.
Bauer recommends accumulating shares and has a price target of $29.25, up 31% from Friday. That would be 25 times his 2008 earnings estimate of $1.17. On Tuesday, the small cap closed at $22.26. Shares of American Ecology have ranged between $17.26 and $24.40 over the past 52 weeks.
SMH Capital analyst David Yuschak has a “buy” on the company with a target of $26.50. “Business conditions in the hazardous waste cleanup industry remain strong, driven by a healthy industrial economy, particularly for the steel and refinery businesses,” Yuschak wrote in a research note. He said government cleanup projects have returned to normal levels, that the government is early into its Base Realignment Closure Act, and that important cleanup opportunities are yet to unfold, in addition to other Army Corps of Engineers projects.
At Needham and Co., American Ecology also merits a “buy” rating. Analyst Theodor Kundtz has a target at $25 and said he values the company at a premium to its peer group given its strong, high degree of visibility and potential to gain market share. He noted as a risk that just three customers — Honeywell, mining company Molycorp and the Army Corps of Engineers — make up the bulk of revenues.
With American Ecology’s (ECOL) nice dividend, expected annual returns of 15%, another record year on tap for 2008, no debt and likely acquisitions, investors will find a lot to like about this company. Now about those neighbors …
About the Author
Contributing author Jennifer Allen has two decades of experience as a writer and editor, mainly as a financial wire service correspondent.
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