U.S. Ecology: An Exceptional Cash Flow and Return on Capital Generator with A Radioactive Competitive Moat

Charles Murphy presented his in-depth investment thesis on U.S. Ecology (ECOL) at Best Ideas 2015.

U.S. Ecology provides treatment and disposal services for hazardous and radioactive waste streams produced by industrial (e.g., steel mill, chemical production, power generation utility) and government (mostly Corps of Engineers Superfund work) customers. The company and two of its competitors own 17 of the 20 hazardous waste landfills in the U.S. Likewise, ECOL owns one of the four radioactive waste landfills in the U.S. Such a favorable competitive landscape helps explain how ECOL is able to consistently generate greater than 20% EBIT margins and high-teens ROIC. The stock price has recently taken a dive on concerns about the company’s exposure to the oil and gas industry. While some of ECOL’s competitors, such as Clean Harbors (CLB), have meaningful exposure to upstream oil and gas, the market is less than 5% of ECOL’s revenue. Even the more stable downstream oil and gas market is only about 12% of ECOL’s revenue. To reach our one-year price target of $48 (which implies more than 20% upside from current levels), we apply a 9.5x EV/EBITDA multiple to the average of our 2015-2016 EBITDA estimates of $145 million and subtract out projected net debt of $318 million.

About the instructor:

Chuck is the managing partner and portfolio manager at Liberty Park Capital Management in Austin, TX. Prior to founding Liberty Park, Chuck was an equity research analyst at Sidoti & Co. in New York. He also worked in Morgan Stanley’s Investment Management division as an analyst in the fund accounting and operations group. Chuck holds a BBA in Finance from Texas A&M University.

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