HSC - Harsco Corporation: A Volatile Play With Some Upside Potential

Summary

• The past few years for Harsco have been a bit volatile, and that trend continued through the first nine months of 2022.
• This may deter some investors, but the firm as a whole continues to generate attractive cash flows.
• Leverage is high and the firm is not without its risks, but it is cheap enough to offer some upside from here.

As the global population has grown, it has become clear that human activity does have an impact on the environment. This can take many different forms, but in response to these activities, regulations have come about necessitating certain ways of handling things like industrial waste. One company that's dedicated to providing the services required to keep this planet cleaner than it otherwise would be is Harsco Corporation ( HSC ). Operationally, the picture for the company has been a bit lumpy in recent years. Overall sales have been growing, but profits and cash flows have not shown the clearest trends. This on its own is a negative when considering the company as a potential investment. On the other hand, though, shares of the business are quite cheap at this time. Because of exactly how cheap the stock is, I would say that the company offers investors a reasonable amount of upside, at least enough to rate the enterprise a soft 'buy' at this time.

Making money from waste

According to the management team at Harsco, the company operates as a global provider of environmental solutions for industrial and specialty waste streams. To truly understand the firm, however, it would be helpful to break it down into its two reportable business segments. The first of these is Harsco Environmental. Accounting for 58% of the company's revenue in 2021, this segment focuses on environmental services and material processing for the global steel and metals industries. In short, the company delivers production-critical on-site operational support and resource recovery solutions, all done through the management of its customers' primary waste or byproduct streams. One example of services provided is slag management, where the company enables slag processing by excavating, removing, and transporting slag from lagoons. It also transports molten slag between the furnace and slag pits. Slack pot repair is another activity provided by the company. The company also provides scrap management services and related inventory tracking, resource recovery regarding valuable metal byproducts, materials handling and logistics, and more.

The other segment the company operates is called Harsco Clean Earth. This particular unit was responsible for 42% of the company's revenue in 2021. Through this unit, the company provides various waste processing services, particularly the processing of hazardous wastes, soil, and dredged materials. All combined, this segment operates 19 RCRA Part B permitted TSDF facilities and supporting 10-day transfer facilities across the US. With these facilities, as well as a fleet of over 700 vehicles, the company services over 90,000 distinct customers. It also holds more than 500 critically important permits that provided various opportunities.

Over the past three years, Harsco has experienced a good deal of growth. Revenue went from $1.20 billion in 2019 to $1.85 billion in 2021. The increase from 2020 to 2021 was an impressive 20.5%. On a percentage basis, the greatest growth for the company during that time was from its Harsco Clean Earth segment, with revenue shooting up 25.9% from $619.6 million to $780.3 million. This rise, according to management, was driven largely by the firm's acquisition of ESOL, which ultimately added $134.2 million to the company's top line. The net effects of price and volume changes, mostly involving volume changes, contributed another $25.6 million to the rise in sales. Growth under the Harsco Environmental segment was also impressive, coming in at 16.8%. This increase from $914.4 million to $1.07 billion was driven largely by price and volume changes amounting to $138.3 million. Foreign currency fluctuations helped the company to the tune of $20.8 million, while new contracts and lost contracts hit sales in the amount of $5.6 million.

It's also worth noting that the company experienced growth across all of its geographic regions. Its greatest exposure, not surprisingly, is to North America. In 2021, 57.4% of its revenue came from there. This was followed up by 23.9% of revenue coming from Western Europe. The greatest growth on a percentage basis though, that the company experienced, was from the Middle East and Africa. Sales there jumped 28.2%, shooting up from $63.4 million to $81.3 million. The slowest growing region was Western Europe, with revenue growth of 17.3%.

On the bottom line, the picture for the company has been quite volatile. Back in 2019, the company generated a net profit of $503.9 million. This turned to a $26.3 million loss in 2020 before narrowing to a loss of only $3.2 million in 2021. Somewhat more consistent has been cash flow. Operating cash flow for the company went from negative $0.2 million in 2019 to a positive $53.8 million in 2020. By 2021, it had grown to $72.2 million. If we adjust for changes in working capital, cash flow would have grown between 2019 and 2021, rising from $95.2 million to $157.8 million. A bit more volatile, meanwhile, has been EBITDA. After dropping from $283.1 million in 2019 to $208 million in 2020, it rebounded some to $252 million in 2021.

The 2022 fiscal year so far looks to be volatile as well. Sales of $1.42 billion in the first nine months of 2022 beat out the $1.39 billion reported one year earlier. On the other hand, high costs pushed profits from $12 million to a loss of $113.4 million. Operating cash flow roughly tripled from $46.8 million to $131.2 million. But if we adjust for changes in working capital, it would have nearly halved from $144.5 million to $74.8 million. Also on the decline was EBITDA. This metric dropped from $193.6 million in the first nine months of 2021 to $168.7 million the same time of 2022.

When it comes to the 2022 fiscal year in its entirety, management said that EBITDA should be between $216 million and $223 million. At the midpoint, this would translate to $219.5 million. Operating cash flow, meanwhile, should be, using midpoint estimates, $217.5 million. Based on these figures, the company is trading at a price to adjusted operating cash flow multiple of 2.8 and at an EV to EBITDA multiple of 8.8. By comparison, if we were to use the data from 2021, these multiples would be 3.9 and 7.6, respectively. As part of my analysis, I also compared the company to five similar firms. On a price to operating cash flow basis, these companies ranged from a low of 4.4 to a high of 21.2. In this case, Harsco was the cheapest of the group. Meanwhile, using the EV to EBITDA approach, the range was from 7.3 to 18. In this scenario, two of the five firms were cheaper than our target.

Takeaway

Based on the data available, Harsco seems to be something of a volatile player from a fundamental perspective. This can be unnerving for certain investors. In addition, it can also result in some volatility from a share price perspective. However, for investors who don't mind that volatility and who don't mind that the company has a net leverage ratio of 5.7, shares do look cheap, both on an absolute basis and relative to similar firms. Because of this, I believe that the firm makes for a decent "buy" prospect at this time.

For further details see: