What happened

Shares of Heritage-Crystal Clean (HCCI), an industrial recycling and cleaning company, fell as much as 14% in early trading on Oct. 20. The big news was the company's after-the-close earnings release on Oct. 19. What's interesting is that the third quarter's revenue and earnings numbers looked pretty good overall, making the sharp stock decline seem a bit out of place. That's doubly true given that the broader market was up in early trading. Reading into management's commentary provides some clues about the disconnect. 

So what

Third-quarter 2022 sales came in at $172 million, up nearly 40% year over year. Earnings per share was $0.98, up from $0.79 in the third quarter of 2021. Management happily reported that revenue, earnings, segment income, earning before interest, taxes, depreciation, and amortization (EBITDA), and adjusted EBITDA were all at record levels. On top of that, the company beat Wall Street consensus on both the top and bottom lines. It would seem investors would like this news.

The glass-half-empty view today probably stems from three factors. At least some portion of the company's upbeat performance relates to acquisitions, which means the records may not be quite as impressive as they sound. Then management made mention of inflationary headwinds in both of its business lines, highlighting that it continues to "fight" to preserve its margins. That could have just been an unfortunate choice of words, but it makes inflation sound like a material and ongoing problem. Lastly, in the oil recycling business, high base oil prices helped prop up financial results. But oil prices have been volatile and they have dropped from early-year highs, so this business could have a more difficult future as well. In other words, there are some good reasons why investors were downbeat.

Now what

Shares of Heritage-Crystal Clean rose sharply in the weeks ahead of its third-quarter earnings release and have now, basically, given up those gains. So perhaps the quick drop isn't as surprising as it may at first seem. Still, investors looking at this company should probably take some time to consider the potential negatives in the comments management made in the news release.