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Greenberg: Clean Harbors Is Not Cleaning Up

About the only surprise about Clean Harbors (CLH), the waste management company, is that almost every analyst who follows it still rates is as a Buy.

That's even after the company's most-recently-reported quarter, which included yet another in a series of sliced guidance, missed expectations or a combo of both.

.

Yet this is the same company:

  • That is still hoping for the best from its Safety-Kleen acquisition late last year, which hasn't generated the margin growth the company forecast.
  • That bought into the oilfield waste disposal and services business at the peak of the oil cycle.
  • Whose CFO (on the job when Safety-Kleen was bought) quit in February after less than a year on the job. He was replaced by the company's former CFO, who is also president. (It's often best when those two jobs are split.)

Chronology: How the Clean Harbors Story Has Changed

What many on Wall Street don't appear to have fully grasped is that thanks to a series of acquisitions, Clean Harbors has morphed from merely a hazardous waste environmental cleanup company, its legacy, into one whose fortunes are tied in a significant way to oil and gas exploration. As the result of a 2009 acquisition, it even operates lodging facilities for oilfield workers.

The strategy doesn't appear to have panned out the way the company had hoped, certainly not yet, evidenced by adjusted EBITDA margins, one of the company's favored metrics. (Actually any margins tell the same story.)

After peaking in 2010 at 18.2%, a year after the acquisition binge started, EBITDA margins have struggled to recover from first-quarter low of 12.9%. Last quarter's 16.1% was an improvement, but still well below a year ago, "primarily due to the weight of the lower-margin Safety-Kleen business," said Morningstar analyst Barbara Noverini.

Therein lies an important part of the story: It wasn't supposed to be this way.

The forays into the oil-and-gas-related services businesses were supposed to help leverage Clean Harbors' existing industrial base and create cross-selling opportunities while expanding its geographical footprint from its traditional base in the Northeast throughout the U.S. and Canada. It has had a steady success in Canada's oil sands.

The acquisition spree culminated with the $1.25 billion Safety-Kleen deal, which boosted revenue by more than 50%. It occurred just as the company's oil-and-gas business was losing steam. Four years out of bankruptcy and on the brink of going public, Safety-Kleen's two principal businesses -- re-refining recycled oil, much of it collected through its other business, and service station parts cleaning -- were expected to save the day.

When the deal was announced, CEO Alan McKim said it would be "immediately accretive."

It hasn't been. In fact, even with synergies from the acquisition, the company has struggled to keep its balance.

"We're disappointed with our performance compared to what the guidance and expectation was with the business," McKim told me in an interview.

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