Clean Harbors Inc (CLH), Waste Connections, Inc. (WCN), Republic Services, Inc. (RSG): Find Cash in Trash

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When I was little, my mom and grandma used to tell me that one man’s trash is another man’s treasure. Clean Harbors Inc (NYSE:CLH), Waste Connections, Inc. (NYSE:WCN) and Republic Services, Inc. (NYSE:RSG) are proof that they weren’t wrong. These companies have built highly profitable, multi-billion-dollar businesses out of waste management. Let’s take a look at them and try to elucidate if they are good long-term investments or not.

All kinds of trash

Clean Harbors Inc (NYSE:CLH)

Clean Harbors Inc (NYSE:CLH) provides a wide array of environmental services in the U.S., operating in five segments: technical services Oil Re-refining and Recycling, SK Environmental Services, Industrial and Field Services, and Oil & Gas Field Services. It leads in various segments of the waste management industry, controlling roughly 70% of North America’s commercial incineration capacity and approximately 20% of hazardous materials landfill capacity. Moreover, the firm’s hazardous waste management assets provide it with a strong advantage that looks very difficult to match (Morningstar).

In this industry, expertise really matters; it might be the difference between complying with environmental regulations and not being able to operate. Fortunately, Clean Harbors Inc (NYSE:CLH) already knows the drill. Furthermore, a trend toward stricter environmental regulation makes compliance more expensive and difficult, and incentives for outsourcing greater. Clean Harbors seems poised to benefit from this situation over the years to come. Even further, the company holds a strong position to benefit from the increasing volume of hazardous waste as the economy recoups, and from new shale plays like Bakken.

Due to high switching costs, the company enjoys a substantial client stickiness and a steady source of revenue. This has resulted in continuous revenue growth over the past few years. This growth was boosted last quarter by the acquisition of Safety-Kleen, which helped revenue rise by over 50% YoY, contributing more than 200,000 clients and an important business diversification. Actually, it has provided leading exposure to the oil re-refining segment. Going forward, multiple cross-selling opportunities open new roads for growth.

As a result, analysts expect the firm to deliver an EPS growth rate around 46% this year and an average of 13%-14% per year over the next five. So, trading at 28 times its earnings, slightlyabove the industry average, I would recommend buying and holding this stock. Upside potentialis significant, especially after the Safety-Kleen purchase.

Small towns, big business

Waste Connections, Inc. (NYSE:WCN) operates in the solid waste segment, providing collection, transfer, disposal, and recycling services in secondary markets of the Western U.S. Over the past several years, the firm has been posting double-digit top-line revenue growth, even through rough economic patches. By serving less-competitive markets, the company has acquired a considerable pricing power, mainly due to the lack of competition. In addition to this stable market, the company has made an incursion in the E&P waste segment, one of higher potential and margins, mainly through the acquisition of R360 Environmental Solutions, a leading provider of non-hazardous oilfield waste treatment and disposal services in the U.S.

Considerably moated against competitors and holding strong pricing power, Waste Connections, Inc. (NYSE:WCN) has outperformed its peers, delivering an operating margin of 19.5% (TTM), versus the 13.2% industry average. These features have also impacted the firm’s beta of 0.5.

Although prospects do not look bad, analysts expect the firm to deliver an average annual EPS growth rate around 12%, underperforming its peers. Meanwhile, Waste Connections, Inc. (NYSE:WCN)’s stock trades above industry average valuations in relation to its earnings, sales, and book-values. Concerned by increased competition in the E&P segment, the firm’s dependence on acquisitions to maintain growth levels, and its assets building faster than its revenue, while trading close to a ten-year high, I’d recommend holding until the valuation becomes more attractive.

Not a trashy investment

Republic Services, Inc. (NYSE:RSG) is one of Waste Connections, Inc. (NYSE:WCN)’s main competitors. As the second largest non-hazardous waste management company in the U.S., only behind Waste Management, Inc. (NYSE:WM), it has dug an economic moat for itself, mainly on the back of its vertical integration and the resulting “operational efficiencies and scale advantages that are difficult for local operators to replicate” (Morningstar). Unlike Waste Connection, however, the company experienced a decline in revenue during the last recession. So, why invest in Republic Services?

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