Clean Harbors (NYSE:CLH) Exceeds Q3 Expectations But Stock Drops

Environmental and industrial services company Clean Harbors (NYSE:CLH) beat Wall Street’s revenue expectations in Q3 CY2024, with sales up 12% year on year to $1.53 billion. Its GAAP profit of $2.12 per share was 3.2% below analysts’ consensus estimates.

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“We delivered profitable growth in both our operating segments while improving our consolidated Adjusted EBITDA margin by 100 basis points from the same period a year ago,” said Mike Battles, Co-Chief Executive Officer.

Company Overview

Established in 1980, Clean Harbors (NYSE:CLH) provides environmental and industrial services like hazardous and non-hazardous waste disposal and emergency spill cleanups.

Waste Management

Waste management companies can possess licenses permitting them to handle hazardous materials. Furthermore, many services are performed through contracts and statutorily mandated, non-discretionary, or recurring, leading to more predictable revenue streams. However, regulation can be a headwind, rendering existing services obsolete or forcing companies to invest precious capital to comply with new, more environmentally-friendly rules. Lastly, waste management companies are at the whim of economic cycles. Interest rates, for example, can greatly impact industrial production or commercial projects that create waste and byproducts.

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Thankfully, Clean Harbors’s 11.3% annualized revenue growth over the last five years was impressive. This is a useful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Clean Harbors’s annualized revenue growth of 7.6% over the last two years is below its five-year trend, but we still think the results were respectable.

This quarter, Clean Harbors reported year-on-year revenue growth of 12%, and its $1.53 billion of revenue exceeded Wall Street’s estimates by 1.2%.

Looking ahead, sell-side analysts expect revenue to grow 7.1% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and shows the market thinks its newer products and services will not lead to better top-line performance yet.

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Operating Margin

Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Clean Harbors has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.6%.

Analyzing the trend in its profitability, Clean Harbors’s annual operating margin rose by 4.2 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Clean Harbors generated an operating profit margin of 12.6%, up 1.3 percentage points year on year. The increase was encouraging, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, R&D, and administrative overhead.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

Clean Harbors’s EPS grew at an astounding 36.8% compounded annual growth rate over the last five years, higher than its 11.3% annualized revenue growth. This tells us the company became more profitable as it expanded.

We can take a deeper look into Clean Harbors’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Clean Harbors’s operating margin expanded by 4.2 percentage points over the last five years. On top of that, its share count shrank by 3.4%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business.

For Clean Harbors, its two-year annual EPS growth of 5.2% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q3, Clean Harbors reported EPS at $2.12, up from $1.68 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Clean Harbors’s full-year EPS of $7.68 to grow by 10.9%.

Key Takeaways from Clean Harbors’s Q3 Results

It was good to see Clean Harbors beat analysts’ revenue expectations this quarter. On the other hand, its EBITDA forecast for the full year missed and its EBITDA fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 7.4% to $244 immediately after reporting.

Clean Harbors’s latest earnings report disappointed. One quarter doesn’t define a company’s quality, so let’s explore whether the stock is a buy at the current price. We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.