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by Debra Fiakas CFA
The solid waste collection and disposal industry has been
transformed by the building enthusiasm for waste recycling.
Founded in 1975, Casella Waste
Systems (CWST: Nasdaq) has been around to experience a
lot of change and has been quick to get on the bandwagon. The
company is a self-described recycler and resource manager as well as
a solid waste collector.
Granted the company is still heavily focused on its conventional
solid waste business. Casella management has outlined a
four-point plan to grow the company and increase profits. Top
on their ‘to do’ list is to find incremental landfill
capacity. They are also trying to create new efficiencies at
each of the company’s thirty-five solid waste collection
operations. That is just the usually blocking and tackling
tactics of an incumbent solid waste handler.
However, Casella has become
much more than an ‘old school’ garbage hauler. Some years
back, Casella added metals recovery and plastics recycling to its
menu of services, at the same time establishing a new revenue stream
from the sale of recovered materials. The company
recycling facilities in its home region in the northeastern
U.S. Additionally, Casella operates nine landfills, four
of which have been outfitted with methane gas recovery
facilities. The company actually produces 25 megawatts of
power for local users.
Casella has also stepped into the organics-to-energy business.
Operating as Casella Organics, the company has established an
anaerobic co-digester at a dairy farm in Massachusetts. The
plant co-digests dairy manure and food residuals from nearby
A little over a year ago in April 2013, I wrote about Casella’s
financial performance here.
Although operating cash flows have been at times ample, the company
has had trouble delivering profits to its bottom line. At the
time I did not have a great deal of confidence in the stock to
deliver returns in the near-term. The stock actually took off
a few months later, rising by as much as 50% after management
provided guidance for sales growth in a range of 2.1% to 4.3% in the
fiscal year ending April 2014. Earnings before interest,
taxes, depreciation and amortization (EBITDA) were guided in a range
of $91.0 million to $95.0 million.
Alas, the stock lost all of its gains as the year progressed.
Casella was able to make good on its plans to grow revenue.
Sales in the fiscal year ending April 2014, were 9.3% higher than
the previous year. However, the company stubbed its collective
Big Toe on profitability. EBITDA was reported as $86.4
million, well below the guided range. Since EBITDA is a
critical factor in CWST valuation, disappointment increased with
each passing quarter.
CWST is now trading near its 52-week low. A review of historic
trading patterns suggests the stock is oversold. There has
been a very strong bearish trend building in CWST since June, after
the company reported fiscal year 2014 financial results. It
seems implausible that the stock could decline from its present
level just under $4.00 per share. Then again, shareholder
equity has been eroded to a deficit and long-term debt levels have
been rising. Coupled with persistent net losses and shrinking
profit margins, the weakened balance sheet does not provide a great
deal of encouragement for investors who might be tempted take
advantage of the cheap price for CWST.
That said, we note that the stock has been at the current price
level four times in the last five years, rising each time by an
average of 75%. The company has a well established customer
base and has been able to convert 11% of its sales dollar to
operating cash. If an investor has confidence in Casella’s
regional stronghold in waste collection and hauling as well as the
new flag the company has planted in the waste-to-energy business,
then it is time to take a long position in CWST wait patiently.
Debra Fiakas is the Managing Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
Neither the author of the Small Cap
Strategist web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.
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