Wednesday, February 26, 2014

Clean Harbors, Compliant Analysts, and “Revenue Ex-Cat-in-the-Hat”

 When readers ask, “Is there a company out there that’s got lower quality earnings than IBM?” the unfortunate answer is, “How much time have you got?”
 That’s because a majority of U.S. companies report some form of “adjusted earnings,” not to mention some form of “adjusted revenues,” and whatever they’re “adjusting” for, Wall Street’s Finest accept them at face value.
 Even Coca-Cola—Warren Buffett’s “perpetual” investment—has taken to reporting a revenue metric we’d never heard of before this earnings season: they call it “currency neutral, ex-structural revenue growth.”
 (If, just for fun, a company started reported “Revenue Ex-Cat in the Hat,” we wouldn’t be surprised if more than a few of Wall Street’s Finest dutifully reported “Revenue-Ex-Cat in the Hat” in their so-called research reports.)
 In any event, if conservative old white-shoe folks from Atlanta can make up stuff with the best of ‘em—and the best of ‘em, of course, would be IBM—you can bet there are a whole lot of companies that dream up all kinds of adjustments the number-crunchers on Wall Street crank into their spreadsheets without a second thought.
 Exhibit A today in this regard is Clean Harbors, a broken (for the moment) “story” stock whose story has been that smart management + pricey acquisitions – “earnings adjustments” = fancy multiple, despite the fact that the acquisitions have proved less than stellar, and the perpetual subtraction of “adjustments” from GAAP earnings has masked a deteriorating business model that only recently (i.e. this morning) came unmasked.
 The fact that CLH’s numbers stank is nothing new: the company hasn’t “made the number” almost since the day its $1.25 billion purchase of Safety-Kleen closed the last month of 2012.  But do not take our word for it: quarterly earnings “surprises” as compiled by Bloomberg (starting with the first Safety-Kleen quarter through today’s report) read as follows: -18%, +14%, -22%, -6%, -20%.
 Of course, “earnings” for CLH, like so many public companies today, is a construct of remarkable fluidity, excluding, just for example, environmental liability accruals that recur like clockwork, and represent the fact that the environment remediation business of the company shells out a lot of cash to clean up after itself.
 Whatever the construct, CLH’s new, “adjusted” EBITDA target for 2014 is about $100 million lower than Wall Street’s Finest were expecting just one year ago.
 And that’s real money, not something the Cat in the Hat dreamed up to keep the kids occupied.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2013)    $4.99 Kindle Version at

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The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

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