Clean Up This Mess
Yesterday's issue of Small Cap Investor Daily generated a number of responses and I've spent the morning reading all the comments that came in. For those of you who missed the issue, I discussed the oil rig disaster in the Gulf of Mexico. You can find yesterday's issue here.
I owned shares of BP (NYSE: BP) before the company's rig exploded, dumping millions of barrels of oil into the ocean. And while I'm not selling my shares now, I'm also not using the pullback in share price to add to my position.
But, I found three small cap companies that are poised to benefit from the oil spill, and for the right reasons. They are helping to clean up the mess. I suggested yesterday that small cap investors may want to try and profit on the solution, rather than the problem.
So let's take a quick look at these three companies, see how they are helping in the cleanup effort.
The three companies are Clean Harbors (NYSE CLH), Nalco Holding Company (NYSE: NLC) and Lakeland Industries (Nasdaq: LAKE). Their stocks all shot higher in the wake of the disaster, but have since pulled back.
Stock #1: Clean Harbors is based in Norwell, Massachusetts and has a market cap of $1.7 billion. The stock closed yesterday at $64.41, and shot to nearly $70 right after the rig accident.
Clean Harbors is a leading North American provider of environmental and hazardous waste management services. I actually brought this stock to the attention of Small Cap Investor PRO subscribers in June of 2009 at around $56 a share and some readers have been able to make a nice profit.
In the wake of the BP accident, Clean Harbors is involved in containing, removing, disposing and recycling as much oil as its 1,500 to 2,000 workers can get their hands on, or at least their equipment on. You can learn more about the company's participation on its website by clicking here.
The company said it will most likely see around $70 million in second-quarter revenue resulting from its cleanup efforts. That will add around 20 percent to analyst estimates of $350 million, bringing the total to around $420 million. Analysts are also projecting increased revenues of around $80 million in 2010 and 2011 stemming from cleanup efforts.
Though the company is still paying interest on debt, it has over $200 million in cash and it is invariably profitable year after year - and should continue to be so going forward. Last year it saw revenues dip. With a current PE of 26.5, the stock does have some premium baked into the share price.
But given that we don't truly know the impact to earnings of its cleanup efforts, there could still be upside. Below $60, this stock is compelling - but I wouldn't chase it here. If you're interested in establishing a position, look to get in around the mid to high $50's after the stock has settled down a bit.
Stock #2: Nalco Holding Company is based in Naperville, Illinois and has a market cap of $3.2 billion. The stock closed yesterday at $23.38 and has been trading in a range from $22 to $26 since early in 2010.
Nalco sells chemicals and technology in three segments: water, paper, and energy. The company is getting a boost now because it sells the dispersants being used to break up the crude oil spilling into the Gulf. These dispersants are designed to break down the crude so that ocean bacteria can digest it.
This is better than a huge oil slick, but there are concerns that massive amounts of dispersants are contributing to lower oxygen levels in the ocean water. It appears that as the dispersants and bacteria break down the crude, a great deal of oxygen gets consumed by the bacteria. Lower oxygen levels make it harder for other ocean dwellers to survive. Of course, this is a negative side effect, but a lesser evil in my opinion than millions of gallons of crude oil floating freely.
Nalco estimates it has brought in around $40 million in revenue to date directly attributed to the cleanup effort, around 1 percent of the company's annual revenue. So the impact to earnings per share here isn't huge. The company has a lot of debt, and net income and cash flows have been a bit erratic over the last couple of years. But analysts are expecting moderate sales growth over the next couple of years, around 5.5 percent. And earnings expansion seems likely with analysts expecting earnings growth of 55 percent and 20 percent this year and next, respectively.
Because of these growth estimates, Nalco's forward PE of 13 looks a lot more attractive than its trailing-twelve month PE of 50. From a fundamental perspective, I'd want to do more work on Nalco before jumping in. But from a technical perspective, if you can pull the trigger at $22 you would be getting in at a major support line.
Stock #3: Lakeland Industries is the tiniest company in this group, with a market cap of only $54 million. This company is only for very speculative investors since, as Byron wrote: "One would need to be really careful with LAKE because it is so lightly traded (average shares/day =7717)… Less than 100K is pretty low to trade into."
This isn't a very liquid stock, and while that can make buying and selling shares challenging, that concern by itself doesn't mean you shouldn't consider it. Just be aware that if you buy shares, you may have them for a while and that there can be large spreads and huge volatility on thinly traded stocks like Lakeland Industries.
So what does it do? Lakeland makes disposable protective clothing, the type that those cleaning up hazardous material, like crude oil, would wear. The company is actually classified as operating in the medical appliances and equipment industry, but it also sells protective coverings that are used to protect from paints, pesticides, bacteria, and so on.
The company has been net income positive for a while, and has only $1.6 million in long term debt. Operating cash flows are also positive, and increasing over the last three quarters. One thing I noticed when looking at the company's cash flow statement is that it has been paying down its short term debt in fairly significant chunks over the last three quarters, which is a good sign. I didn't dig enough to find out why short-term borrowings jumped so much, to $17.8 million in early 2009, but would recommend doing so before buying shares.
Lakeland only had sales of $94 million in fiscal 2010, so a sizeable group of orders for the cleanup effort could have a material impact on revenues. But it would be wise to do quite a bit more research on Lakeland before jumping in to have a better understanding of the company's business model, and the positive impact to earnings that a string of 'cleanup' orders could have.
***So there you have it, three small-cap stocks that are potential ways to invest in the oil cleanup effort. All three are compelling for different reasons, and have their own risks and potential rewards.
I'm not endorsing any of these three, merely bringing them to your attention so you can decide for yourself. If I get enough requests from readers asking me to take a closer look at any of them, I'll do so in a future issue. Let me know, my address is: editorial@smallcapinvestor.com
***I received one email from across the pond wondering where readers could sign up for my investment advisory newsletters. Sean writes from Norfolk, England:
"I have been receiving your free newsletter for some time now and I enthusiastically read them when I have time. I am impressed with the level of knowledge and information contained within the letters.
I have recently read the letter about BP which mentioned Tyler …as a 'hobbyist fisherman', I also fall into that category and I'm wondering how you as a company make money… Do you have any information on the range of services you provide?"
Byron, one of the ways we make money is through our investment newsletter services, one of which is specific to small cap investments, Small Cap Investor PRO. You can learn more about my latest gold stock recommendation and sign up for Small Cap Investor PRO by clicking here. You can also learn more about all of my paid advisory newsletters at www.wyattresearch.com.
