Wednesday, July 20, 2011

Nalco Gets Bought -- Yielding 33% Return in Eight Days, Who's Next?

On July 11, I wrote that investors should consider buying shares in Nalco Holdings (NYSE: NLC), the $4.3 billion maker of cleaning chemicals, because it was a takeover candidate and its stock price was low relative to its projected earnings growth.

If you took my advice, congratulations! That's because you just made a 33% return on your investment in just over a week. How so? Ecolab (NYSE: ECL) announced Wednesday that it will acquire Nalco for $5 billion, or $38.80 a share -- 33% above its July 11 price of $29.17. Who's next?

The reason I noticed Nalco was that a rival had been acquired the day before. As I wrote, Arch Chemicals’ (NYSE:ARJ) stock was up 11.3% on the news that it would be bought by Swiss specialty chemicals and biotechnology company Lonza for $1.2 billion in cash. But it turns out that Nalco is not the only medium-sized player in the pollution cleanup business.

I'd consider buying shares in Clean Harbors (NYSE: CLH) -- it doesn't make cleanup chemicals but it does offer environmental cleanup services. And the beauty of investing in the $1.8 billion sales Clean Harbors is that it is doing quite well without needing to be acquired. The question for investors is whether there is still upside in its stock if it remains independent.

Here are four reasons why:
  • Excellent first quarter earnings. Clean Harbors reported first quarter 2011 EPS of $0.86 -- 32% above analysts' estimates. And it raised its 2011 revenue forecast to a range between $1.62 billion and $1.67 billion, up from its previous forecast and ahead of analysts' expectations of $1.60 billion, according to Thomson Reuters I/B/E/S.
  • Inexpensive stock. Clean Harbors price to earnings to growth (PEG) ratio of 0.80 makes it inexpensive (a PEG of 1.0 is considered fairly priced). This is particularly impressive given that it just it an all-time high of $112 a share. Clean Harbors P/E is 21 and its earnings are expected to grow 26% to $4.35 in 2012.
  • Rapid growth and solid balance sheet. Clean Harbors has grown quickly. Its $1.8 billion in revenues have increased at an average rate of 19.5% over the last five years and its net income of $140 million has risen at a 38.2% annual rate over that period. Its cash has risen faster than its debt -- at a 38% annual rate from $84 million (2006) to $306 million (2010). During that time, its debt rose at 21.8% annual rate from $123 million to $271 million.
  • Out-earned its capital cost -- at an accelerating rate. Clean Harbors earned more after-tax operating profit than its cost of capital, and it's gaining ground fast. Clean Harbors EVA momentum which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales was 8%, based on 2009 revenue of $1 billion, and EVA that rose from negative $73 million in 2009 to $16 million in 2010, using a 10% weighted average cost of capital.
Clean Harbors could be an attractive acquisition candidate for a company interested in environmental cleanup. If not, its stock seems to be doing quite nicely on its own.


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