Clean Harbors, Inc. (CLH, $108.25): “Clean Future Ahead for CLH”
By: Andrew Payne, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
- Clean Harbors, Inc. (CLH, $108.25) is a leading provider of energy, environmental, and industrial waste services operating through two segments: Environmental Services (78.3% of revenue) and Safety-Kleen (21.7%)
- Safety-Kleen engages in the sales of industrial and automotive cleaning parts and is the largest re-refiner and recycler of used oil in North America
- CLH acquired HydroChemPSC (HPC) in Q3 of 2021, which directly ties into the company’s Industrial Services revenue portion included within their Environmental Services segment.
- CLH beat Q4 2021 EPS by 30% and revenue by 9%
- Waste Management (WM) has potential interest in a buyout of CLH
Key Points: Clean Harbors has been a leader in environmental waste disposal over the past two decades. Through strategic acquisitions, the company has started to expand both geographically and into other industries. These acquisitions are meant not only to expand their reach, but also to add the acquiree’s operational efficiencies and automation to their own services. Most recently, the company acquired HydroChemPSC (HPC), which directly relates to the company’s Industrial Services revenue portion included within their Environmental Services segment. CLH was heavily affected by the COVID-19 pandemic and saw revenues drop 8%, as the result of less industrial waste volume from decreased production across all industries. Prior to 2020, CLH was growing revenue at a 5-year CAGR of 7.8% and EBITDA at a 5-Year CAGR of 9.3%. As waste volume returned in 2021, CLH saw its revenue skyrocket 24% YoY.
Some risks that CLH continues to face include changes in regulation and high levels of debt that the company has taken on to finance acquisitions. Environmental waste and oil re-refining are both highly regulated industries. Changes in regulation could have an adverse effect on operations. As of 2021, CLH has approximately $2.5 billion in debt. These substantial levels of debt could adversely affect the company’s financial state if they are not able to meet their obligations. While CLH is highly leveraged, the risk behind the investment is very small given the similarities in operations of CLH and the newly acquired HPC.
What has the stock done lately?
Since being added to the AIM portfolio, there have been developments of a possible buyout deal from Waste Management (WM). WM is the largest residential waste disposal company in North America and is looking to expand its industrial waste segment. An acquisition of Clean Harbors would do just that, but they will most likely have to pay a large premium to acquire CLH. On February 24, 2022, CLH released earning for Q4 2022. Within the earnings report, management discussed the early successes of the HPC acquisition and highlighted steeper revenue estimates for FY 2022 than most analysts. Management also revealed an updated capital expenditure schedule that highlighted more investments into incinerator development and expansion in 2023 - 2024.
Past Year Performance: Over the past year, CLH’s share price grew 24.1%. This was largely due to recovery from the pandemic, driven by sales growth of 28% YoY. This increase in sales growth was caused by the return of waste volume to normal levels. The pandemic significantly reduced waste usage.
Clean Harbors was added to the AIM portfolio at a share price of $94.25 and is now trading at $108.25, yielding a 14.8% return since added to the portfolio. Looking forward, CLH’s growth strategy includes expanding its Safety-Kleen segment of revenue and growing through acquisitions. CLH has continuously taken strides to grow this segment of revenue and seen growth in the oil segment of revenue at a four-year CAGR of 54%. This is attributed to the increase in volume over this period of time and price of base oils over the past two years. As businesses continue to transition to clean solutions, Safety-Kleen’s oil segment will continue to increase the amount of oil they collect each year, which is currently 250 million gallons. The company’s acquisition of HPC is estimated to generate $744 million in additional revenues and EBITDA of $115 million. In addition to the added revenue, management has also projected $40 million in cost synergies produced by cross-selling, implementation of automation, and improvements of operational efficiencies. It is my recommendation that CLH remain in the AIM small cap portfolio.