This Waste Disposal Company Looks Interesting After the Recent Acquisition

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Clean Harbors (NYSE: CLH) has not been performing well on the market since the beginning of 2012. The stock's price has declined from around $64 per share at the beginning of 2012 to $54.80 per share at the time of writing. As of March 2013, Clean Harbors is in the portfolio of Ron Baron and Steven Cohen. Is it a good buy at its current price? Let’s find out.

Great strategic acquisition

Clean Harbors, incorporated in 1980, is considered to be one of the leaders in hazardous waste disposal business, operating in four business segments: Technical Services, Field Services, Industrial Services and Oil & Gas Field Services. The majority of the company’s adjusted EBITDA, $245 million, was generated from the Technical Services segment. The Industrial Services segment ranked second with $139.9 million in adjusted EBITDA in 2012, while the Oil & Gas Field Services and Field Services segments contributed only $75.8 million and $25 million, respectively, in adjusted EBITDA.

At the end of 2012, Clean Harbors acquired Safety-Kleen, the biggest re-refiner and recycler of used oil in North America, for around $1.3 billion. The company felt excited about this acquisition, as it would strengthen Clean Harbors in the small quantity waste generator market, support its waste treatment capabilities, tap on the increasing demand for recycled products, especially re-refined oil. The acquisition also enables Clean Harbors to expand its Environmental Services business in North America. With more than 200,000 customer locations of Safety-Kleen, the cross-selling opportunities could be substantial. Clean Harbors has recently raised its cost synergies estimate to around $70 to $75 million for 2013. The full year adjusted EBITDA was expected to stay in the range of $605 - $620 million.

Because of the Safety-Klein acquisition, Clean Harbors increased its debt level substantially. As of March 2013, it had $1.42 billion in equity, $233 million in cash and short-term investments and $1.4 billion in long-term debt. The acquisition also boosted the goodwill and intangible asset level, at nearly $1.14 billion. At $54.80 per share, Clean Harbors is valued at $3.3 billion. Thus, the market values the company at around 7.2 times its forward EBITDA.

The cheapest business among its much larger peers

Compared to its much larger peers Waste Management (NYSE: WM) and Republic Services (NYSE: RSG), Clean Harbors is the cheapest valued. Waste Management serves a diverse customer base with more than 21 million customers with 390 collection operations in 2012. According to the company, around 80% of the commercial and industrial customers have a contract with a length of 3 years or more. Both industrial and municipal customers are loyal to Waste Management, staying with the company for around 10 years and 12 years, respectively, on average. Going forward, Waste Management expects to generate around $2.15 to $2.20 EPS, with the free cash flow of around $1.1 to $1.2 billion, after the estimated capital expenditure of $1.3 to $1.4 billion. Waste Management, at $40.50 per share, is worth around $18.9 billion on the market. The market values Waste Management at a bit higher valuation, at nearly 8.3 times its forward EBITDA.

Republic Services (NYSE: RSG) reported that more than 80% of its sales were annuity-type. Most of its revenue, 29% of the total revenue, was generated from the commercial business line, while the residential business line ranked second, accounting for 24% of the total revenue. For 2013, Republic Services estimated to produce around $1.86 to $1.91 earnings per share, with the adjusted free cash flow of $675 to $700 million. For the full year, Republic Services plan to spend around $324 million to buy back its shares and pay around $447-$342 million in dividends. At $34 per share, Republic Services is worth around $12.3 billion on the market. The market values Republic Services at 8 times its forward EBITDA.

In terms of dividend yield, Waste Management is the winner with the highest dividend yield at 3.5%. Republic Services ranked second with 2.8% dividend yield while Clean Harbors has not paid any dividends yet. However, if Clean Harbors paid around 60% of its earnings in dividends to shareholders, its dividend yield would have been more than 2.6%.

My Foolish take

Clean Harbors seems to be a good pick now due to its lowest valuation and the possible synergies from Safety-Kleen deal. According to James Rutledge, the company’s vice chairman and CFO, Clean Harbors has tried to offer its customers a lot of services together so that Clean Harbors could become one-stop shopping for its customers. Barron’s thought that when the economy improved and the acquisition was accretive to earnings, its shares could gain by more than 45%. 

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Republic Services and Waste Management. The Motley Fool owns shares of Clean Harbors and Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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