Wednesday, June 23, 2010

Wedbush takes A Calm Look at Clean Harbors; Removes from 'Best Ideas' Ups Target Price a Bit (CLH; BP)

The stock closed at $68.14 yesterday, down $1.17.
We looked at the stock last week with the comment:
"The stock closed today at $67.84 up another 8 cents. I would not chase."
From Barron's Hot Research:

Wedbush removed the industrial-services firm from its Best Ideas List.
By Wedbush Securities ($69.31, June 22, 2010)
CLEAN HARBORS (ticker: CLH) was added to the Wedbush Best Ideas List on Jan. 7, 2008, when the stock was trading at $52.62. Shares of Clean Harbors have appreciated 31.8% since we added [the company] to the Wedbush Best Ideas List compared to (4.54%) for the Russell 2000 Index and (2.31%) for the Russell 2000 Value Index during the same period.
[B-HOT-CLH-0622]
With a gradual improvement in economic activities driving improved asset utilization in the company's core, or legacy, assets (including Eveready [Canadian operations]), we remain confident in our long-term investment thesis. Our investment thesis assumes: Cost synergies and operational efficiencies should drive core earnings before interest, taxes, depreciation and amortization (Ebitda) margin in excess of 17% in 2011; incineration rates recovering to the low-90s as organic growth from legacy businesses resume; implementation of a price increase in its technical services area; and incremental free cash flow from services in the Gulf [of Mexico] and deleveraged balance sheet could accelerate strategic, tuck-in acquisitions.
Since the largest oil spill in North America and easily the largest emergency cleanup event in the company's history, shares have seen a strong move since late April 2010. While recent surveys and reports peg the mid-August 2010 time frame before the well is likely to be capped, we believe the recent run-up in share price captures the activities the company is performing in the Gulf for this event project.
We are anticipating the company's role with the cleanup efforts to continue for several months after capping (we are now modeling $80 million in second-half 2010 up from $40 million). However, we see increased risk that the amount billed per day will drop in third-quarter 2010 as the event should not last forever. If the timing of the cap remains on target, we would expect investors to increasingly focus on core business trends, which is likely to slow the recent enthusiasm for the shares.
We estimate the Gulf oil spill could contribute $180 million in revenue in 2010, including $97 million in second-quarter 2010.
Our $76 price target [up from $72] is derived by applying an eight times multiple, up from 7.5 times, to our fiscal 2011 estimate of $264.8 million and adding $5 per share from long-term environmental liabilities. We believe that our 0.5-1.0 times premium multiple to its peer group is warranted given strategic asset base, improving fleet-utilization rate within its industrial segment and a net recovery in legacy end-markets.
With the recent climb in share price to $69.31, the shares increasingly reflect the company's role in the Gulf oil spill, which we believe is on track to contribute in the range of $150 million to $200 million in revenue in 2010 (we have now modeled $188 million, up from $110 million).
Despite the tragic nature of the spill and the likelihood that the environmental impact could last for years, we do not expect the amount Clean Harbors' bills per day to accelerate from the current level of $1.5 million to $1.8 million. We expect the company to easily top the revenue guidance in second-quarter 2010 that it provided on May 18, 2010, ($53 million to $70 million, or 15% to 20% of the then consensus revenue estimate of $352 million). We also expect investors to treat the Ebitda contribution as a one-time event regardless of how deep into 2011 the company renders services.
With 2011 Ebitda forecast to grow 15% from core, nonevent business Ebitda of $230 million in 2010, we believe investors will continue to pay the midcycle multiple of eight times forward Ebitda estimate ($265 million in 2011), implying a present valued share price in the range of $76, up from $70 to $72 per share. [We maintain our Outperform rating.]
With a price target approximately 10% above its current level, we expect shares of Clean Harbors to outperform other names in our research coverage universe. However, with this event business not expected to last forever and the core business improving but not at a rate solely sufficient to justify the recent share-price appreciation, in our opinion, the Wedbush Investment Committee is removing shares of Clean Harbors from Wedbush's Best Ideas List.
-- Al Kashchalk
-- Mark Benson
The companies mentioned in Hot Research are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of Barrons.com or Dow Jones & Company, Inc. Share prices at the time the report was issued and the date of the report are in parentheses.
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