Back in November, I thought I had found a company that was ready to take its industry by storm. Swisher Hygiene (Nasdaq: SWSH) was led by a man with a history of turning trash into gold -- literally. That man, Wayne Huizenga, was going back to his Waste Management (NYSE: WM) roots and planning to grow Swisher primarily through the acquisition of smaller companies around the country. Unfortunately, since my bullish call in November, Swisher has been the laggard of my CAPS portfolio.
While I am by no means a CAPS All-Star, Swisher is one of a handful of companies that I have rated that are in the red, though it is a good 30 points ahead of the next worst performer. After taking another look at the company, I may have placed too much faith in Huizenga's golden touch, so I have decided to halt my bullish CAPScall on the hygiene company, replacing it with the dreaded "red thumb" of an underperform rating.
Though I am not yet convinced the stock will go to zero, it may be awhile before the company starts producing market-beating returns. Nevertheless, its acquisition strategy and relative size within its industry could be working against it in the long run.
Stop acquiring so much
One of the quickest ways for a company to grow is to purchase smaller competitors. The fact that this worked for Huizenga in the past when growing Waste Management led me to believe that it would work for a company like Swisher, as well. This may not be the case, as more than 40% of Swisher's assets are now made up of goodwill and other intangible assets. These intangible assets, which are partially the remnants of the premium over book value paid while acquiring smaller competitors, can adversely affect some valuations of the company.
Every year, goodwill must be tested for impairment: i.e., the company has to determine if the items it acquired in the past have changed markedly over the past year. Swisher acknowledges this fact in its annual report, stating "potential impairment of goodwill ... could adversely affect our financial condition and results of operations." With the company having had no impairment during 2010, I will be taking a closer look at 2011 when the company releases its annual results in the near future.
Industry comparison
In an industry dominated by a couple of large companies, Swisher appears to be using its acquisition strategy to gain size and revenue. The company remains unprofitable, however, and only 15% of its revenue growth during a recent quarter was organic and not the result of new acquisitions. Its primary competitors seem to be doing much better over the past year, and all have shown some level of profitability:
| Company | Revenue (TTM) | Earnings per Share (TTM) | 1-Year CAGR |
|---|---|---|---|
| Swisher Hygiene | $164.0M | ($0.17) | (48.1%) |
| Ecolab (NYSE: ECL) | $6.8B | $1.91 | 24.7% |
| Stericycle (Nasdaq: SRCL) | $1.7B | $2.69 | (2.5%) |
| US Ecology (Nasdaq: ECOL) | $154.9M | $1.01 | 31.0% |
Source: Yahoo! Finance. TTM = trailing 12 months. CAGR = compound annual growth rate.
Swisher's primary growth focus over the past few years has been on acquiring companies that remove and clean linens from businesses such as small restaurants, as well as companies that produce the cleaning chemicals required to return these items to like-new condition. It is not alone in performing these services, but its primary competitors tend to work on a larger scale than the small, single-location businesses that Swisher focuses on.
Ecolab provides similar services on a much larger scale to large restaurant and hotel chains like McDonald's and Starwood Hotels. This has allowed Ecolab to become the real industry leader, boasting over 10% market share in the industry. Stericycle removes medical waste from more than 450,000 customers, encompassing hospitals, drug manufacturers, dentists, pharmacies, and veterinarians. Even US Ecology, which is pretty close to Swisher's size, has found a niche in removing hazardous and radioactive wastes. The small, yet profitable, company also pays a nice dividend, making it one of most promising dividends in the industry.
So long, Swisher
Sometimes, even a great leader cannot lead a company to greatness. I am hesitant to be bearish on this company going forward because of the presence of Wayne Huizenga, and his success in business over the past 40 years, beginning with Waste Management and including successes at Blockbuster Video and AutoNation. After all, Waste Management and its fleet of green trucks didn't take over its industry overnight. Nevertheless, for the sake of my CAPS profile, my bullish prediction is coming to an end.
However, I will pay close attention to the company and will revisit my CAPScall in three months. To follow the company along with me, add Swisher Hygiene to My Watchlist today and keep an eye on this potential multibillion-dollar industry.
