Sector Watch: Waste management companies
One man’s trash can be another man’s treasure — especially during recessionary periods. To unearth profits in the unlikeliest of places, waste management companies are generally considered defensive investments since they provide essential services and have long-term contracts. Not bad, especially when you’re Waste Services Inc. (Nasdaq:WSII) and American Ecology Corp. (Nasdaq:ECOL), two fast-growing waste management companies.
Demand for hazardous waste cleanup grew rapidly during the 1970s and 1980s as a result of new environmental laws and actions by federal and state agencies to clean up contaminated sites under the federal Superfund law. Hazardous waste cleanup is a $2 billion North American market today, not including the much larger industrial maintenance market. Barriers to entry are huge because of the arduous federal, state, provincial and local permitting processes. No new competitors have entered North America in the past decade and as a result, established players such as American Ecology and Waste Services are benefiting from more stable pricing and new regulatory requirements that increase in-house disposal costs and encourage outsourcing.
Waste Services provides collection, transfer, disposal and recycling services for commercial, industrial and residential customers in the United States and Canada. The company collects trash for approximately 84,000 commercial and industrial customers and 8.4 million residential homes. The terms of its contracts are typically one to five years for commercial customers and three to 10 years for residential services under contracts with municipalities.
The company operates in the Ontario market where it holds the No. 1 or No. 2 market share in the areas it serves, and in Western Canada, where it has leading market shares in Alberta and British Columbia. Waste Services also operates in Florida, where it ranks No. 3 in market share and No. 2 in disposal capacity. The company owns a fleet of 1,200 vehicles and operates seven landfills, 22 transfer stations, 14 recycling centers and 35 collections operations.
Waste Services has been improving margins by maximizing the density of its collection routes and vertically integrating its operations. The company also pursues tuck-in acquisitions, which are acquisitions that increase its presence in its existing markets as opposed to acquisitions in new markets. Acquisitions are sought in new markets benefiting from above-average economic or population growth.
Waste Services’ revenues increased 25% last year to $488.3 million in 2007 from $391.4 million in 2006. Acquisitions, net of divestitures, added $72.8 million to revenues last year. The company’s operating income grew 168% year over year to $44.7 million from $16.7 million, and earnings before EBITDA nearly doubled to $102.8 million in 2007 from $57.9 million in 2006. As a result, Waste Services was able to reduce its net losses to $23.1 million, or $0.50 per share, last year from $48.5 million, or $1.37 per share, in the prior year. In 2008, this company anticipates 5% to 6% organic revenue growth, operating income rising to a $55 million to $65 million range and positive per-share earnings from continuing operations in a $0.30 to $0.35 range. Analysts think Waste Services can produce 26% growth next year and 18% annual growth over the next five years. My $15 price target for Waste Services is above Tuesday’s closing price of $7.89. Shares have ranged between $7.26 and $12.46 over the last 52 weeks.
American Ecology provides hazardous waste clean-up services. The company disposes of radioactive, hazardous, PCB and industrial waste for government agencies and commercial customers, including refineries, chemical plants, manufacturing facilities, electric utilities, steel mills and medical labs. American Ecology is the nation’s oldest provider of radioactive and hazardous waste clean-up services and has been in business for over 50 years.
American Ecology has a multi-year contract with the U.S. Army Corps of Engineers to dispose of low-level radioactive materials and hazardous waste as part of FUSRAP (Formerly Utilized Sites Remedial Action Program) clean-up. Although the current contract expires in 2009, multi-year projects are currently underway that will likely extend beyond 2016.
The company also has a long-term contract with Honeywell International, Inc. (NYSE:HON) to transport, treat and dispose of an estimated 1.2 million tons of chromite ore processing residue. Under a court order, Honeywell is required to complete this clean-up project by November 2009. In addition, American Ecology treats and disposes of hazardous waste from steel mills from multiple states at its Grand View, Idaho, facility. This business has been contracted on a multi-year basis and produces stable revenues.
In 2007, American Ecology recorded its third consecutive year of revenue, income and disposal-volume growth. The company’s revenues rose 42% year over year to $165.5 million from $116.8, disposal volume rose to a record 1.1 million tons, and net income improved 22% to $19.4 million, or $1.06 per share, from $15.9 million, or $0.87 per share. This strong trend continued in the first quarter of 2008 with revenues up 19% year over year to $46.2 million from $39 million and net income up 19% to $5.9 million, or $0.32 per share. Management projects per-share earnings increasing to a $1.17 to $1.23 range in 2008. Analysts anticipate this company will generate 18% growth next year and 20% average annual longer-term growth. My $35 price target for American Ecology is 38.5% above Tuesday’s closing price of 25.27. Over the last 52 weeks, shares have ranged between $18.51 and $28.45.
About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience.
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May 10 01:55pm
Waste Management stocks: Thanks for the survey.
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