Down 25% YTD, Clean Harbors Stock Has Limited Upside

After a 65% rally off the March bottom, Clean Harbors Stock (NYSE: CLH) has limited upside potential based on its valuation. Clean Harbors, the leading provider of environmental and industrial services throughout North America, has seen its stock rally from $40 to $65 off the recent bottom compared to the S&P which moved around 55%. The stock is leading the broader markets, as investors are positive about its revenue prospects which suffered due to temporary closure of its customer sites and the lower demand of oil – top-line reduced by 13% y-o-y in the third quarter. Further, the stock is down 24% from levels seen in late 2019.

Clean Harbors’ stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This makes CLH stock fully valued, as the demand and revenues will likely be lower than last year.

Some of this rise over the last 2 years is justified by the roughly 16% growth seen in Clean Harbors’ revenues from FY 2017 to FY 2019. However, the net income figure didn’t echo the same sentiment and dropped from $100.7 million in 2017 to $97.7 million in 2019. This decline could be attributed to the gain on sale of a business and the enactment of the U.S Tax Act in 2017 (one-time tax benefit of $42 million in 2017).

While the company has seen steady revenue growth over recent years, its Price-to-sales (P/S) multiple has remained more or less the same. A key factor behind the trend is the change in its net income margin figure from 3.4% to 2.9% over the last two years, with the figure likely to see a marginal decrease in the current year. We believe the stock is unlikely to see a significant upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard What Factors Drove A 21% Change in Clean Harbors Stock between 2017 and now? has the underlying numbers.

Clean Harbors’ P/S multiple has hovered around 1x over FY 2017 and FY 2019. Further, the company’s P/S is close to 1x now, which leaves a limited upside potential when the current P/S is compared to levels seen in the past years – P/S of just above 1x at the end of 2019.

So Where Is The Clean Harbor Stock Headed?

Clean Harbors provides environmental, energy, and industrial services, enabling its customers to achieve their sustainability goals. Due to the Covid-19 crisis, the company has suffered losses driven by the closure of its customer sites and lower oil demand. The company reported a revenue drop in Q3 2020 mainly driven by negative growth in Industrial services & other and Safety-Kleen Oil segments. However, as its customers’ operations move toward normalcy and consumer demand for oil improves, the company’s revenues are expected to improve. That said, Clear Harbors is likely to see restricted positive movement in its stock price in the near term, as its quarterly revenues are doubtful to see an immediate revival.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams