Heritage-Crystal Clean: Upside Exists But Easy Money Has Been Made (NASDAQ:HCCI)

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This is not an unprofitable speculative enterprise capital-backed firm. This is not an overhyped fashionable billion-dollar firm, both. This small-cap inventory is a worthwhile firm with sturdy fundamentals and development potential in a boring trade.

We are speaking about Heritage-Crystal Clean, Inc. (NASDAQ:HCCI). HCCI’s inventory has doubled since late 2020 and is at the moment standing at roughly $28 per share, so we’ll re-evaluate it from a risk-reward perspective.

Heritage-Crystal Clean – A Brief Overview

HCCI operates its enterprise by the Environmental Services and Oil Business segments. The Environmental Services phase consists of full-service components cleansing, containerized waste administration, wastewater vacuum, antifreeze, and area companies. These companies enable HCCI’s clients to outsource their dealing with and disposal of parts-cleaning solvents in addition to different hazardous and non-hazardous waste.

The Oil Business phase consists of used oil assortment actions, re-refining actions, oil filter elimination and disposal companies, and the sale of recycled gas oil. On that entrance, HCCI operates a used oil re-refinery with an annual nameplate output of lubricating base oil which has a capability of 75 million gallons of used oil feedstock. The firm recycles used oil into top quality lubricant base oil and different merchandise, and it is a provider to corporations that produce and market completed lubricants.

As of January 1, 2022, HCCI operated 91 branches that adjust in dimension and serve buyer places within the overwhelming majority of the United States, the District of Columbia, and components of Ontario, Canada. It’s additionally noteworthy that HCCI ranks excessive in its trade, as quoted under (emphasis added):

We consider that we’re the second largest supplier of full-service components cleansing companies and used oil assortment companies within the U.S., the second largest producer of remanufactured antifreeze, and a number one supplier of containerized waste companies to small and medium sized clients.

and (emphasis added):

We have the second largest used oil re-refinery, by capability, in North America. We consider that our largest competitor, Safety-Kleen, (a wholly-owned subsidiary of Clean Harbors, Inc.), at the moment controls a majority of the used oil re-refining capability in North America.

HCCI Has Got Consistent Profitability And Rock-Solid Balance Sheet

Debt-free cash-rich HCCI entered the financial downturn in 2020 with a robust steadiness sheet and a internet money place, which allowed it to emerge unscathed from this difficult interval. However, it was not resistant to the destructive affect of the COVID-19 pandemic.

Specifically, income and internet revenue declined 8.7% and 35%, respectively, in comparison with 2019. Fortunately, 2020 full-year internet revenue was favorably impacted by a $6.5 million reversal of an $11 million class motion lawsuit cost taken in This fall 2019, so internet revenue in 2020 ended up being $11.9 million.

However, the corporate managed to battle exceptionally excessive price inflation in varied components of its enterprise, returning to development mode in 2021. It introduced sturdy high line and backside line YOY development just a few days in the past, as illustrated under:

Fiscal Year
(In Thousands)
2021 2020 2019 2018 2017
Service revenues $ 262,863 $ 245,474 $ 250,491 $ 250,262 $ 233,999
Product revenues 227,737 136,178 171,273 159,921 131,958
Rental revenue 24,734 24,299 22,663
Total revenues $ 515,334 $ 405,951 $ 444,427 $ 410,183 $ 365,957
Operating Expenses
Operating prices 352,796 321,648 $ 349,603 $ 323,165 $ 276,102
Selling, common, and administrative bills 56,987 47,091 50,224 47,714 47,401
Depreciation and amortization 23,542 24,563 18,249 16,157 17,967
Other (revenue) expense – internet (988) (5,365) 13,490 1,606 (10,940)
Operating revenue 82,997 18,014 12,861 21,541 35,427
Interest expense – internet 933 1,252 869 1,052 1,094
Income earlier than revenue taxes $ 82,064 $ 16,762 $ 11,992 $ 20,489 $ 34,333
Provision for revenue taxes 21,116 4,825 3,243 5,451 5,923
Net revenue 60,948 11,937 8,749 15,038 28,410

As proven above, the revenue margin enlargement in 2021 cannot go unnoticed. Specifically, working margin for 2021 was 28% in comparison with 15.8% working margin in fiscal 2020. The enhance in margin was primarily resulting from a rise within the unfold between the netback (gross sales worth internet of freight affect) on its base oil gross sales and the value paid/charged to its clients for the elimination of their used oil together with a rise in gross sales quantity in its Environmental Services phase. Corporate SG&A expense for fiscal 2021 stayed flat at 12.1% of income, in comparison with 12.7% of income in fiscal 2020.

This restoration in 2021 was the results of each natural and inorganic development. Actually, the important thing components that contributed to this glorious operational efficiency had been the restoration from the destructive impacts of the COVID-19 pandemic within the firm’s segments, the large enchancment in base oil pricing within the Oil Business phase, and the acquisitions accomplished in 2021.

Specifically, HCCI acquired three smaller gamers for $45.5 million in 2021, as quoted under:

On August 24, 2021, Heritage-Crystal Clean accomplished the acquisition of sure belongings of Bakersfield Transfer, Inc., and Cole’s Services, Inc., which processed, saved, and disposed of hazardous waste inside the state of California. On September 13, 2021, we accomplished the acquisition of Raider Environmental Services of Florida, Inc., which has expanded our community of wastewater processing, oil assortment and non-hazardous waste solidification to higher serve our clients in Florida and all through the Southern United States. On September 27, 2021, we accomplished the acquisition of Source Environmental, Inc., which will increase the Company’s penetration within the hazardous and non-hazardous waste enterprise in a number of markets within the western U.S. This transaction additionally supplies us the chance to internalize the efficiency of sure area service actions within the western U.S.

Most of the income (62%) in 2021 got here from the Environmental Services phase, whereas income within the Oil Business phase accounted for 38% of the full income, as illustrated under.

For the Fiscal Years Ended, Increase
(hundreds) January 1, 2022 January 2, 2021 $ %
Environmental Services $ 318,167 $ 290,592 $ 27,575 9.5 %
Oil Business 197,167 115,359 81,808 70.9 %
Total $ 515,334 $ 405,951 $ 109,383 26.9 %

It’s additionally price noting that HCCI doesn’t have excessive buyer focus, so it isn’t closely depending on a handful of consumers. Instead, HCCI has a big and extremely numerous buyer base that’s primarily composed of small firms within the car restore and manufacturing industries, as quoted under:

Our deal with small and mid-sized companies has enabled us to draw quite a lot of clients engaged in a variety of commercial companies (similar to manufacturing, transportation and distribution) and car service. This diversification helps insulate us from disruption attributable to the doable lack of a single massive account. Our buyer base consists of over 95,000 lively buyer places. In fiscal 2021, our largest single buyer in our Environmental Services phase represented 0.5% of our consolidated revenues, and our largest ten clients represented roughly 3.4% of our consolidated revenues. In the Oil Business phase, for fiscal 2021, our largest single buyer accounted for five.8% of our consolidated revenues, and our largest ten clients represented 24.8% of our consolidated income.

Last however not least, from a money circulation standpoint, HCCI generated constructive working money circulation and constructive free money circulation for an additional 12 months in a row, as illustrated under.

For the Fiscal Years Ended,
(hundreds) January 1,2022 January 2,2021
Net money offered by (utilized in):
Operating actions $ 91,047 $ 44,769
Investing actions (67,854) (32,477)
Financing actions (34,499) (5,411)
Net (lower) enhance in money and money equivalents $ (11,306) $ 6,881


Outlook is constructive with development being natural and inorganic, regardless of robust comps forward.

Specifically, on the subject of natural development, HCCI expects to announce high line YoY development in 2022, primarily based on the newest CC under (emphasis added):

Now I wish to stay up for focus on our outlook for the longer term. In our Environmental Services phase, we skilled a terrific begin to our first quarter from a income perspective. Despite the truth that we skilled extra confirming instances of COVID-19 in January 2022 than any earlier month throughout the pandemic, we now have nonetheless managed to generate double-digit income development on a year-over-year foundation for the primary a number of weeks of the primary quarter. Assuming the general US economic system remained regular, we anticipate to realize low double-digit income development throughout the first half of 2022, with slower development within the second half of the 12 months, as we face more durable comparable outcomes from 2021.

From an working margin share standpoint, we anticipate to proceed to battle greater prices throughout the first half of the 12 months. While our fourth quarter worth enhance within the Environmental Services phase was profitable, we didn’t anticipate that the components driving greater prices in varied components of our enterprise weren’t solely continued, however worsened all through the fourth quarter and finish of the primary quarter.

In response to those greater prices, we applied extra worth will increase throughout the first quarter. Since a few of these will increase weren’t applied till the top of February, we anticipate working margin to be in a low 20% vary throughout the first quarter, with gradual enchancment all through the rest of the 12 months. We anticipate to exit fiscal 2022 as phase working margin at or near 27% offered inflationary situation stabilize as anticipated.


From an Oil Business phase perspective, we’re proud of the beginning of 2022. Demand from our clients stays regular and we anticipate it to stay constant offered additive provide improves as we transfer into the busier spring and summer time seasons. While the upper crude oil costs will proceed to place strain on our pay for oil, we consider the mixture of things I simply mentioned will enable us to generate an working margin within the mid-20% vary throughout the first half of 2022.

When it involves inorganic development, HCCI will probably announce new acquisitions within the subsequent quarters, as quoted under:

I believe most of our development will come from acquisitions. We haven’t got numerous plans to open natural branches except it is across the tuck-in acquisition. And I believe we have talked about that the final couple of quarters, we want to open up in new markets with a tuck-in acquisition and bolt-on our service traces. It’s simply a lot simpler on this atmosphere due to the problem in recruiting staff, staffing and roll vehicles, I imply, it is a robust labor market. So we will go to the tuck-in acquisition route and we’ll broaden that manner.

HCCI Stock Valuation

Based on the outlook above, we estimate that income and adjusted EBITDA in 2022 might be about $550 million and $115 million, respectively, which excludes any acquisitions.

Meanwhile, with zero debt and $56 million in money, HCCI’s Enterprise Value at the moment is about $630 million.

Therefore, EV-to-2022 Revenue and EV-to-2022 adj. EBITDA are about 1.1 occasions and 5.5 occasions, respectively, the present worth of $28 per share. Obviously, HCCI just isn’t costly and nonetheless has upside potential from at present’s worth for traders with an funding horizon of 2-5 years.

However, HCCI was absurdly low cost in late 2020 when it traded properly under $20 per share, so we consider that the simple cash has been made.

Heritage-Crystal Stock Insider Ownership

We at all times verify the insider possession earlier than shopping for it for our portfolio and earlier than advising our subscribers to purchase it too. That mentioned, insiders (10 individuals) personal approximately 7.5% of the inventory, as illustrated under.

Name Number of Shares Beneficially Owned Percentage of Outstanding Common Stock

Fred Fehsenfeld, Jr.

1,046,800 4.3%
Bruce Bruckmann 124,609 *
Charles Schalliol 54,515 *
Robert Willmschen, Jr. 51,828 *

Jim Schumacher

27,273 *
Carmine Falcone 2,124 *
Anthony Chase 1,641 *
Beneficial Owners proudly owning greater than 5% of widespread inventory (apart from administrators and named government officers):

The Heritage Group

5,005,444 20.7%

Fehsenfeld Family Trusts

1,540,959 6.4%
Named Executive Officers:

Brian Recatto

670,505 2.8%
Mark DeVita 89,925 *
Ellie Bruce 84,636 *

All administrators and government officers as a bunch (10 individuals)



* Less than 1%

This 7.5% stake is not low, however it’s not excessive both. As additionally illustrated above, The Heritage Group and Fehsenfeld Family Trusts personal 20.7% and 6.4%, respectively. Given that these shares are owned by members of the family, we take into account that Mr. Fehsenfeld is motivated to make HCCI succeed, though he disclaims helpful possession of those shares, as quoted under (emphasis added):

Mr. Fehsenfeld disclaims helpful possession of the shares of widespread inventory owned by these members of the family besides to the extent of his pecuniary curiosity therein. In addition, Mr. Fehsenfeld serves as certainly one of 9 trustees who collectively are empowered to behave on behalf of The Heritage Group. Mr. Fehsenfeld disclaims helpful possession of the shares of widespread inventory owned by The Heritage Group listed within the desk above, besides to the extent of his pecuniary curiosity therein, and not one of the shares held by The Heritage Group are included within the shares listed within the desk above as being beneficially owned by Mr. Fehsenfeld. In addition, the variety of shares beneficially owned doesn’t embody the 1,540,959 shares of widespread inventory held by the Fehsenfeld Family Trusts, for which Mr. Fehsenfeld is a co-trustee.

In different phrases, let’s imagine that insider possession is sort of 35%, together with the shares held by The Heritage Group and Fehsenfeld Family Trusts. This signifies that insider possession is excessive, so insiders’ pursuits are aligned with shareholders’.

However, institutional possession is low at simply 15.2%, as illustrated under.

Name Number of Shares Beneficially Owned Percentage of Outstanding Common Stock
Beneficial Owners proudly owning greater than 5% of widespread inventory (apart from administrators and named government officers):

ArrowMark Colorado Holdings

2,129,995 8.8%

T. Rowe Price Associates, INC.

1,552,185 6.4%

Therefore, the CEO wants to think about presenting the corporate to funds and establishments within the subsequent months in an effort to inform the viewers a compelling story about HCCI and its potential to develop and make income sooner or later.


From an operational standpoint, we consider that current shareholders and potential patrons ought to monitor the next dangers very vigilantly:

1) Commodity danger: HCCI benefited from the numerous enhance in oil costs in 2021, however we consider that if oil costs don’t exceed $100 within the subsequent quarters, will probably be short-lived.

In different phrases, we forecast that the development in oil costs will regularly flip down, so oil costs will regularly drop and/or go sideways in 2022-2023, which is able to weigh on the corporate’s (Oil Business phase) netback and profitability. To say it otherwise, we forecast that the corporate’s margin enlargement in 2021 just isn’t sturdy and won’t final by 2023.

2) Competition: The competitors is predicted to stay intense, which may possible stop HCCI from efficiently implementing its development technique, as quoted under:

We face intense competitors within the industrial and dangerous waste companies industries and from different used oil re-refiners: The markets for components cleansing, containerized waste administration, used oil assortment, wastewater vacuum companies, antifreeze recycling, and area companies are intensely aggressive. Numerous small firms present these companies at a regional or native degree and might be able to compete with decrease overhead and working prices. In addition, Safety-Kleen, a wholly-owned subsidiary of Clean Harbors, Inc. and our largest competitor, has held substantial market share within the full-service components cleansing trade for the final 5 many years and has developed a cloth market share in used oil companies, together with used oil assortment, vacuum companies and containerized waste administration. Safety-Kleen has larger monetary and different assets and larger title recognition than us. Our enterprise development, monetary efficiency, and prospects could also be adversely affected if we can not successfully compete in opposition to these opponents, or if any of our opponents develop services or products superior to these supplied by us. We may lose a cloth variety of clients if Safety-Kleen or different opponents materially decrease their costs, enhance service high quality, or develop extra aggressive product and repair choices.

In addition, firms concerned within the waste administration trade, together with waste hauling, separation, restoration, and recycling, might have the experience, entry to clients, and monetary assets that might encourage them to develop and market companies and merchandise aggressive with these supplied by us. We additionally face competitors from different companies that present comparable advantages to our clients as these offered by us. In addition, new expertise concerning the therapy and recycling of used solvent might result in functionally equal or superior services or products turning into accessible, which can lower the demand for our companies and merchandise or trigger our services to grow to be out of date.

In the previous a lot of our opponents introduced plans to enter the used oil re-refining or base oil manufacturing enterprise or broaden their current used oil re-refining or base oil producing companies by including extra capability. If the value of crude oil and the value for re-refined oil merchandise will increase, opponents might once more take into account these plans. The extra competitors might make it tougher for us to promote our re-refined base lube oil. In addition, additional competitors within the assortment of used oil feedstock might enhance our price to gather used oil or stop us from accumulating sufficient feedstock to function the used oil re-refinery at capability.

3) Acquisitions: As quoted above, HCCI will pursue acquisition alternatives within the subsequent quarters to broaden its US footprint and operational capabilities. But the success just isn’t a positive factor and an acquisition may find yourself being a failure. For occasion, HCCI might not be capable to efficiently combine the acquired enterprise with out substantial expense and/or the acquired enterprise may fail to generate anticipated income or earnings.


HCCI has been an outperformer since late 2020, once we suggested subscribers to our analysis to purchase it at $14 per share. This outperformance was largely the results of the corporate’s operational excellence over the past twelve months, rock-solid steadiness sheet, and low key metrics.

At the present worth of $28 per share, we consider that the simple cash has been made. However, the corporate has a development technique in place and its key metrics at the moment usually are not excessive. Therefore, barring unexpected occasions, upside nonetheless exists primarily based on a 2- to 5-year funding horizon.

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