By David Randall
NEW YORK (Reuters) - Even as its share price has slumped 8 percent in the year to date, hazardous waste manager Clean Harbors, Inc. has cleaned up in terms of fund-manager interest as more of them bet on one of the down sides of the energy boom.
Manufacturers large and small have opened U.S. plants to take advantage of low energy costs as cheap natural gas and shale oil transform the United States into one of the world's largest energy producers, in turn swelling the amount of battery acids and other chemicals left over from the production process.
The refinery businesses along the Gulf Coast, including those of Valero Energy Corp, Marathon Petroleum Corp and Exxon Mobil Corp, have thrived as a result of higher oil output. Meanwhile, demand has also risen for companies to treat the byproducts, ranging from wastewater to sludge.
That's helped to lure a swarm of fund managers to Norwell, Massachusetts-based Clean Harbors, which controls about 70 percent of commercial incineration capacity in North America and about one-fifth of the landfills that can accept hazardous material, according to analyst estimates, putting it ahead of competitors like Veolia Environmental Services SA.
Indeed, 43 mutual funds added a position in Clean Harbors over the last quarter, sending its total ownership up 15 percent to 460 funds, according to fund tracker Morningstar.
That level of ownership, which includes positions held by well-known funds such as the $5.8 billion Baron Small Cap and $8.9 billion Fidelity Mid-Cap Stock fund, is considered high for a company with a market value of just $3.3 billion.
In comparison, retailer Rite Aid Corp, one of the largest small-cap companies in the benchmark Russell 2000 index with a $6.1-billion market cap, is owned by 469 funds.
The spike in fund ownership comes even as Clean Harbors faces a sagging stock price and analyst skepticism.
The company missed analyst expectations in its most recent quarter and lowered its guidance for the year, a fallout from its attempt to merge the commodities-sensitive businesses it has acquired over the past few years with its core line of hazardous waste disposal and clean up.
Its shares are down 8.2 percent since January 1, and 5.2 percent over the last 12 months.
At about $53, the company's share price is just 4 percent below the median analyst target price of $55.50, according to Thomson Reuters data. Four out of 14 analysts who cover the stock rate it a 'strong buy,' down from six analysts who had the same rating 60 days ago.
VALUE FUNDS KEEN
To be sure, the lagging share price is one reason value-oriented funds are buying now, fund managers and analysts said.
"We've been buying it more as it's been getting cheaper and the story became confusing to people," said Bryant VanCronkhite, portfolio manager of the $859 million Wells Fargo Advantage Special Mid-Cap Value fund.
The company missed earnings estimates largely because of the downturns in its oil-recycling business, which makes up a fifth of revenues, VanCronkhite said.
Those losses didn't harm the competitive advantages that Clean Harbors enjoys, including the high barriers to entry in its field and expertise in fields ranging from landfills to cleaning up oil spills, he said.
Investors will likely need to see two or more quarters of cost-cutting and growth before they are convinced that the company has figured out how to streamline its disparate business lines, said Scott Levine, an analyst at Imperial Capital, who has a neutral rating on the stock and recently lowered his target price to $52.50 from $65.
"Management has indicated that all options are on the table, which we see as a good sign" that it may sell or contract its exposure to more commodity-dependent business lines, Levine said.
The company also said it would buy back up to $150 million in shares, and has targeted $75 million in cost-cuts that it did not factor into its earnings forecasts, suggesting it is being conservative in its outlook, said Adam Thalhimer, an analyst at BB&T Capital Markets.
Thalhimer maintained his 'buy' rating despite the company's earnings coming in 8 cents below his estimate of 52 cents a share, and lowered his target price to $55 from $66.
"There's a longer-term opportunity with Gulf Coast industrial production. The end markets this company operates in are good, so the only question is whether it can take advantage and put up better results," he said.
(Editing by Richard Valdmanis and Bernadette Baum)