US Ecology (NASDAQ:ECOL) reports its fourth-quarter and full-year 2015 results after the market closes on Thursday, Feb. 18. Investors should expect another challenging quarter from the environmental services company, as top management indicated when it announced third-quarter results that it expected cyclical market headwinds to continue into the fourth quarter.
These headwinds, which US Ecology's management believes are short term, have resulted in a slowdown of its business, including a deferment of remedial project-based event work. Reflecting these challenges, US Ecology stock's total return is negative 28% for the one-year period ending on Feb. 12. The stock remains, however, a decisive winner over the five-year period.
Other players in the broad waste management and environmental services industry that are also focused on the industrial and commercial markets, such as Clean Harbors, also had a challenging year in 2015. This indicates that at least the bulk of US Ecology's challenges, indeed, do appear to be market-related, rather than company-specific execution issues. Those companies that have significant consumer and municipal operations, such as behemoth Waste Management and large player Republic Services, have been performing better. That's largely because these operations are less cyclical. Republic, in fact, just reported steady-eddy fourth-quarter results last week, with revenue growing 2.7% year over year, while earnings were flat.
Here's what to focus on in US Ecology's report.
Focus on the company's expectations, not Wall Street's
The company's own expectations are more important than analysts' estimates. We'd like to see US Ecology meeting its internal guidance, or at least providing solid reasons it doesn't. The company pared back its full-year 2015 guidance last quarter because it expected the headwinds that it encountered in the third quarter to continue into the fourth.
Full-year 2015 adjusted EBITDA core business*
$122 million-$125 million
Full-year 2015 adjusted EPS**
While long-term investors shouldn't pay too much attention to analysts' estimates, these expectations often help explain market reactions. So it's worth noting that analysts are looking for quarterly earnings per share of $0.47 on revenue of $131.7 million, representing a year-over-year earnings increase of nearly 12% on a revenue contraction of just over 16%. For the year, the consensus estimates are EPS of $1.72 on revenue of $557.66 million, representing earnings and revenue contractions of nearly 15% and 24.6%, respectively.
So, analysts are actually expecting US Ecology's 2015 earnings to fall $0.01 short of the lower end of the company's guidance range.
Improvements in cash flow, debt, and margins from Allstate Power Vac divestment
As expected, US Ecology divested its Allstate Power Vac business on Nov. 1. This was a low-margin industrial cleaning services business that the company obtained when it acquired competitor EQ Holdings in 2014.
US Ecology has said that it planned to use the majority of the proceeds obtained from the sale to pay down debt (its debt load significantly increased when it bought EQ) and that the sale would improve its cash flow. Additionally, since Allstate was reportedly a lower-margin business, we should expect to see an improvement in margins. We're probably not going to see any margin improvements in the fourth quarter because of the expected continued market headwinds, but hopefully management will comment on this subject.
2016 pipeline and outlook
Last quarter, CEO Jeff Feeler said in the earnings release that the company anticipated that 2016 would be a better year than 2015:
We believe the current quarter challenges are short-term and reflect a changing business cycle as manufacturers and select Base business customers adjust for slowing growth in 2015. As we cycle through the completion of some of our larger project-based business, market opportunities continue to be strong. We have secured work that has commenced the reloading of remedial cleanup projects for 2016 and with a solid pipeline we remain optimistic in our long-term prospects and market position.
Hopefully, we'll hear another reassurance that the pipeline of remedial cleanup projects remains "solid," and that the company has secured some of those market opportunities that Feeler characterized as "strong." If this doesn't prove the case, we'll want good explanations.
It's probable that the company will provide full-year 2016 guidance for revenue, adjusted EBITDA, and EPS, as is customary in the first quarter of each year. Ideally, guidance for these metrics will be at least an incremental improvement, on a pro rata basis, from the company's results in 2015.
As a reminder, US Ecology has two segments. Its environmental services (ES) segment includes all of the company's legacy operations and the legacy EQ treatment and disposal facilities. Its field and industrial services (FIS) segment includes all of the legacy EQ field and industrial services business.
Investors can likely expect that fourth-quarter results will show that US Ecology had another challenging quarter. The primary focus should be on the outlook for 2016. Once market conditions improve, US Ecology's results should, too, as long as it continues to maintain its strong moat.