A Dirty But Stable Business to Weather the Trade War
The ebb and flow of trade tensions between the U.S. and China have been an important driving force behind the market’s recent ups and downs. With no end to the trade drama in sight, and a U.S. president who frequently moves stocks with his Tweets, heightened market volatility could continue.
For investors with long time horizons, selling everything and running for the sidelines isn’t a great idea. Historically the stock market has gone up over time. Plus, the market is unpredictable and difficult to time. You could end up doing worse than if you had just stayed invested.
An alternative to consider is to adjust your portfolio toward stocks with low exposure to trade uncertainties. Companies with mostly or all domestic operations, especially if their businesses aren’t economically sensitive, should offer some protection.
High Barrier to Entry, Stable Business
An example of such a company to consider is US Ecology (NSDQ: ECOL), a specialist in the handling of hazardous waste, a niche market in the larger general waste management industry.
For good reason, the hazardous waste industry is highly regulated. You would not want any company disposing of harmful, in some cases radioactive, waste in unsafe ways, which would poison the environment and the plants and animals (including humans) living in it.
Entities that work with hazardous waste, including the operation of treatment plants and landfills, must have government permits. As a result, the industry barrier to entry is high, and customers have a limited choice of disposal service vendors within a reasonable distance. Established operators with a proven track record like US Ecology hold a distinct advantage.
US Ecology’s Environmental Services segment accounts for about 70% of company revenue. In this segment the company provides hazardous waste management services at company-owned treatment and disposal facilities. It owns five hazardous landfills and one radioactive landfill, plus 16 treatment facilities.
In its Field & Industrial Services segment, the company provides packaging, collection, and waste management solutions at customer sites and at its temporary storage facilities as well as emergency response services. The segment typically offers lower margin and less competitive advantage than the other segment. Overall, US Ecology estimates that its total addressable market amounts to $25 billion.
Trade Buffer, Recurring Revenue
The company’s domestic focus provides insulation from trade tensions. The U.S. accounts for 87% of revenue and Canada contributes the rest. In Canada, the company has one landfill and two treatment facilities.
Additionally, trade war or not, as long as there’s industrial activity, there will be waste generation. The waste includes hazardous waste, US Ecology’s specialty. Indeed, some 80% of the company’s treatment and disposal revenue comes from recurring activity, resulting in a steady revenue stream. One-off events also contribute to revenue.
In June, US Ecology agreed to acquire NRC Group (NYSE: NRCG) and combine their operations in an all-stock deal that valued NRCG at $12 a share, or $966 million. The merger will expand US Ecology’s presence in marine and rail transportation and energy industries.
The purchase will also diversify US Ecology’s geographical footprint into Europe, South America, and the Middle East. However, the international business only represents less than 7% of NRC Group’s revenue and operating profit, so the combined company will still be focused on the U.S.
NRC Group is the only U.S. commercial Oil Spill Response Organization that provides standby emergency response to clean up oil spills. The acquisition will also add landfill assets to the fold.
New Earning Power, But at a Price
The combined company will immediately approach $1 billion in annual revenue. U.S. Ecology expects NRC Group to contribute earnings per share growth in the mid-single digits and synergies of about $20 million per year.
However, based on NRCG’s closing price right before the deal, US Ecology is paying a 36% premium. It also remains to be seen whether diversifying a bit from its core hazardous waste treatment and disposal business is a wise move.
US Ecology’s Environmental Services segment consistently has operating margins around 30%. By comparison NRC Group’s overall operating margin was just 18% last year.
Still, if the trade drama takes a turn for the worse, defensive companies like U.S. Ecology should offer a place of respite.
Another area that can generate market-beating gains, despite the trade war and worries about recession, is the roll-out of fifth generation (aka 5G) wireless technology.
The global implementation of ultra-fast 5G will expedite the emergence of the Internet of Things and transform the daily realities of businesses and individuals. Companies tapped into 5G will reap a multi-year bonanza that’s immune to headline risk. Learn more about 5G opportunities here.