Clean Harbors (NASDAQ:CLHB) is cleaning up today, posting the largest gain for any stock on the Nasdaq, up 55% after reporting a surprise third-quarter profit. A closer look at the results and business, however, do not support the investor enthusiasm.
The company provides environmental and waste cleaning services, running 52 hazardous waste management facilities, including wastewater treatment, landfill, incineration, storage, and disposal. This is the type of company you hope doesn't need to have services all around the country, but it does, with operations in 36 states and Puerto Rico.
The stock is soaring because the company met its debt contracts for the first time this year, and because of a surprise $0.48 per share ($7.4 million) non-GAAP profit on an 81% gain in quarter three revenue, versus a $2.76-per-share loss ($33.4 million) one year ago. The profit, however, is not a result of operations; it comes from an $8.7 million noncash gain "associated with the valuation on the embedded derivative on the company's series C preferred stock."
Barring this gain, the company lost money again. In fact, even with the gain, it still lost $0.09 per share on fully diluted common shares. Meanwhile, most of the gain in revenue was due to an acquisition, although the company does not do much to elucidate the numbers for investors, merely saying, "Last year's third quarter included only 20 days of combined [post-merger]" operations."
Further, this quarter's pseudo-profit is anything but the reliable start of recurring net income. The company states that "in future periods, stock price increases will result in a non-cash charge to earnings" (due to the series C preferred stock), so the preferred stock may bite back.
The company went on to cut the revenue outlook for the year, having fallen short this quarter, but said fourth-quarter profits, excluding certain items, should rise from quarter three. It is also restating cash flow results for quarter's one and two this year, with updated numbers likely stronger.
Surely, though, not strong enough. Clean Harbors has had negative free cash flow all year, and as of June had only $5 million in cash and equivalents and $156 million in long-term debt. Its most current balance sheet does not break out cash specifics. But the company sure does focus on EBITDA, a pointless measure of performance when common investors are rewarded by earnings per diluted common share.
Confused financials, restating results, lower guidance, a rich valuation on projected 2004 earnings, a reliance on preferred shares to cast positive light on current results -- it all has the smell of something to avoid. The company was able to cut costs and grow -- as it trumpets -- EBITDA, but it's a far cry from being an operation that investors should flock to.
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