Sometimes you find an oddball company that doesn't seem to fit easily into one compartment or another. Such a company is Clean Harbors (NYSE:CLH). It does a little bit of this and a little bit of that, all based around industrial and environmental services. Need someone to clean up your oil or chemical spill? Clean Harbors can help. Have to set up a work camp at a remote field location? Clean Harbors does that, too. And through its Safety-Kleen subsidiary, it even re-refines used oil and sells it.
Another thing it does is make money. Quite a lot of money, actually -- more than $2.4 billion so far this year. And based on its Q3 earnings report, Clean Harbors seems to be knocking it out of the park. But in this case, there's a story behind the numbers that makes them a bit less rosy.
The raw numbers
|Metric||Q3 2018||Q3 2017||YOY change|
|Revenue||$843.2 million||$755.8 million||11.6%|
|Net earnings||$31.1 million||$12.1 million||157%|
|Operating cash flow||$117.5 million||$104.5 million||12.4%|
|Free cash flow (adjusted)||$64.4 million||$68.8 million||(6.4%)|
Looks can be deceiving
The numbers are up -- in some cases, way up -- from the year-ago quarter. At first glance, investors might want to break out the champagne. But there's a big asterisk on some of these numbers.
This quarter's numbers include revenue and income from Veolia North America's Industrial Cleaning Services Division, which Clean Harbors bought in Q1 2018. The year-ago quarter's numbers do not, so that 250% increase in net earnings isn't all organic, and should be taken with a grain of salt.
Still, even with the Veolia numbers stripped out, Clean Harbors posted respectable numbers. On the earnings call, management indicated that about $47 million of revenue was due to the acquisition. That means that organic revenue growth clocked in at about 5.3%. Still, not too shabby.
However, CFO Michael Battles admitted that in the year-ago quarter, thanks to hurricane-related disruptions (three hurricanes in one quarter), the company saw comparatively weak performance, which makes this quarter look particularly good by comparison. But he may be overstating things: Q3 2016 was even worse from a revenue standpoint, with overall revenues of just $729.5 million.
The stellar increase in net earnings came from higher pricing across various businesses, in addition to the Veolia acquisition. On the earnings call, management cited higher pricing at Safety-Kleen, higher incineration pricing, and higher average prices per ton at the company's landfills.
The bottom line is that the company -- thanks in part to its Veolia acquisition -- is growing revenue and earnings at a healthy clip.
What management had to say
Besides cautioning that the year-ago quarter was an easy comp, management seemed pleased by the quarter's results, particularly considering that the company's incinerators -- a major revenue and earnings driver -- only operated at 84% of capacity. That was largely due to "a heavy schedule of planned maintenance... plus a few unplanned days at several locations," according to CEO Alan McKim.
McKim was also optimistic about the company's long-term prospects, saying in a press release:
We enter the final quarter of 2018 with momentum supported by an array of favorable market trends and internal initiatives that should benefit us in 2019 and beyond. The chemical and manufacturing renaissance under way in the United States, which is being driven by the low cost of natural gas, should drive continued growth of high-value waste streams into our disposal network. ... Overall, we continue to see a number of opportunities to drive profitable growth and enhance margins across our businesses through better pricing, cross-selling, higher utilization and cost controls.
Clean Harbors has underperformed the market and larger waste management companies like Waste Management and Republic Services over the past five years, although a big market reaction to its strong Q2 2018 earnings report skyrocketed its stock past those larger companies for the year. It's worth mentioning that Waste Management and Republic Services each turned in a stellar Q3.
Still, as this earnings report shows, Clean Harbors has several opportunities for growth through its high-margin incineration business and the domestic oil and gas boom, which creates numerous opportunities for its cleanup services. It's definitely a stock to keep an eye on.