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Can This Waste Manager Help Clean Up Your Portfolio?

By Howard Smith - Mar 6, 2020 at 10:29AM

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Clean Harbors is effectively a contractor for sustainability initiatives.

ESG investors concentrate on companies that perform well in environmental, social, and governance categories, and renewable energy providers are one example of environmentally minded companies. Clean Harbors Inc. (CLH 0.10%), North America's leading provider of environmental, energy, and industrial services, should also fit into that category. Investors looking for an ESG-friendly company can look at Clean Harbors' results for what is going right with the business, along with how the business is doing right for the environment. 

Green barrels with recycling symbols on them.

Image source: Getty Images.

A growing, founder-led business

CEO and Chairman Alan S. McKim started Clean Harbors in 1980. Through investments and acquisitions, the company has become the leading service provider of its kind, and the largest hazardous waste disposal company in North America. In what could be a rather stagnant business that does nothing more than follow GDP growth, the company has delivered increasing revenue for a compound annual growth rate (CAGR) of 5.35% over the most recent three years. This compares to an average of 2.3% for annual GDP, according to the U.S. Bureau of Economic Analysis.

Metric 2019  2018 2017  2016 
Revenue (billion) $3.4 $3.3 $2.94 $2.76

Data source: Clean Harbors Financial Filings.

Clean Harbors' two reporting segments are environmental services and Safety-Kleen. Environmental services includes technical services, industrial and field services, and oil, gas, and lodging services that specifically serve the energy industry.

Safety-Kleen is a business the company acquired in October 2012 for $1.25 billion. The service provides closed-loop environmental services, including used oil collection, recycling, rerefining, and parts washing for small-quantity users. It currently accounts for annual revenue of approximately $1.2 billion, or about 35% of total sales.  

More sustainable solutions

The majority of current revenue comes from environmental services, a segment largely driven by GDP and industrial output. Over the past several years, its top four industries served -- manufacturing, chemical, refineries, and automotive --have made up almost half of the business. 

Among all its customers, the company reports that the demand for more sustainability is growing, and it has been responding in several ways. It has rerefined over 3.5 billion gallons of used oil -- a process that involves removing impurities from used oil to allow it to be reused. It recycles solvents in over 1 million parts washers annually, and the destruction of ozone-damaging chlorofluorocarbons (CFCs) in its incinerators helps reduce the release of carbon dioxide. It also provides emergency response for chemical spills and other potentially damaging events. 

The business strategy

The company expects growth to continue to come from expanding its services and geographic coverage. It can leverage growth by cross-selling between its two segments. The plan for 2020 is also to grow through higher pricing, its mix of waste streams, and increased project volumes. Separately, it will launch an e-commerce platform, and intends to pursue emerging growth opportunities that will arise from PFAS contamination remediation services. 

The midpoint for 2020 guidance sees adjusted free cash flow increasing by about 8% compared to last year. Historically, the stock price has followed the trend of increasing free cash flow.

CLH Chart

CLH data by YCharts

Additionally, the company has not included any benefits in its assumptions related to new marine emission regulations called IMO 2020. Beginning in 2020, the International Maritime Organization (IMO) has ruled that marine sector emissions in international waters be slashed, by using lower sulfur fuels. Clean Harbors believes it will ultimately benefit from these new regulations in its rerefining business. 

Clean Harbors' environmental solutions align well with customers shifting their focus toward sustainability. Investors looking for an investment in the ESG framework would be wise to give Clean Harbors another look.


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