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Clean Harbors (CLH) Rides on Buyouts, High Debt a Concern

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Clean Harbors, Inc. (CLH - Free Report) stock has rallied 14.7% in the past three months, outperforming the industry’s gain of 1.7%.

We believe that the positive impact of acquisitions, efficiency improvement initiatives and shareholder-friendly moves has improved its price performance.

Notably, Clean Harbors reported better-than-expected first-quarter 2018 results.The company’s adjusted loss came in at 12 cents per share compared with a loss of 19 cents in the year-ago quarter. The figure was narrower than the Zacks Consensus Estimate of a loss of 14 cents. Revenues came in at $749.8 million, surpassing the consensus mark of $717.8 million and increasing 8.8% year over year on growth across key verticals.

What’s Driving Clean Harbors?

Acquisitions have been a key growth catalyst for Clean Harbors to expand in both new and existing markets. On Feb 23, the company completed the acquisition of the U.S. Industrial Cleaning Business of Veolia Environmental Services North America LLC (the "Veolia Business") for $120.0 million. The buyout is expected to boost Clean Harbors’ geographic presence, customer base and improve the scale and potential of industrial services.

In 2017, Clean Harbors completed four acquisitions, which contributed revenues of almost $14.5 million and helped the company in multiple lines of services.  In 2016, seven businesses were purchased which helped the company in the sale of its oil products. The company continues to pursue inorganic growth opportunities in multiple geographies and lines of business. The global acquisition strategy increases Clean Harbors’ customer base by providing a long-term growth platform.

Clean Harbors’ focus on improving its efficiency and lowering operating costs through advanced technology, process efficiencies and stringent cost management are also appreciable. It eyes strategic investment in businesses, which are likely to increase productivity.

Additionally, Clean Harbors enjoys a competitive advantage in terms of its multiple locations across North America, especially in areas near the treatment, storage and disposal facilities (TSDFs). By setting up additional service locations near TSDFs, the company expects to minimize capital expenditures and increase its market share. This, in turn, is likely to drive additional waste into the company’s existing facilities, thereby increasing capacity utilization and enhancing overall profitability.

We are impressed with Clean Harbors’ consistent record of returning value to shareholders in the form of share repurchases. In first-quarter 2018, Clean Harbors repurchased approximately 280,000 shares for $14.3 million. In 2017, 2016 and 2015, the company returned $48.9 million, $22.2 million and $73.3 million to its shareholders, respectively, through share buybacks. Such moves indicate the company’s commitment to create value for shareholders and underline its confidence in its business.

Risks

Clean Harbors’ demand cycle is highly seasonal. With climatic conditions affecting customers' spending for products and services, Clean Harbors sees a decrease in demand for its products, oil collection, recycling and environmental services in the first quarter due to cold weather. This reduces the volume of waste generated. Severe cold weather conditions further result in higher labor and operational costs. Factory closings during year-end holiday season also reduces waste volume and lowers the demand for oil products.

Additionally, Clean Harbors’ balance sheet is highly leveraged. As of Mar 31, 2018, long-term debt (net of current portion) was $1.6 billion against $186.4 million of cash and cash equivalents. Such a cash position implies that Clean Harbors needs to generate adequate amount of operating cash flow to service its debt. Also, high debt may limit the company’s future expansion and worsen its risk profile.

Zacks Rank & Stocks to Consider

Currently, Clean Harbors is a Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A few better-ranked stocks in the broader Business Services sector include Waste Connections, Inc. (WCN - Free Report) , Advanced Disposal Services, Inc. (ADSW - Free Report) and Stericycle, Inc (SRCL - Free Report) . All the stocks carry a Zacks Rank #2 (Buy).

The long-term expected EPS (three to five years) growth rate for Waste Connections, Advanced Disposal Services and Stericycle is 13.3%, 15.5% and 9.6%, respectively.

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