Tuesday, May 05, 2015

Barbarians at the Gate of Casella Waste Systems

There is a horde of barbarians gathering outside the walls of waste handler Casella Waste Systems, Inc. (CWST:  Nasdaq).  Well, they are not exactly barbarians.  Actually, it is a single activist investor.  However, Casella’s board of directors might feel as much threat as if they were in line of sight for the slings and arrows of Viking raiders.

JCP Investment Management has proposed a slate of three nominees for Casella’s board of directors.  JCP charges Casella with under performance and poor corporate performance.  They apparently believe that some new blood in the boardroom could bring a sharper focus to the Company’s strategic decision making.    

Casella has been struggling with its waste collection and transport business.  It has dabbled in waste-to-energy with little success.  In the year ending December 31, 2014, the Company reported a net loss of $9.0 million on sales totaling $552.6 million.  The company has an operating profit margin of 6.1%.  Unfortunately, there are significant interest expenses running near $40 million per year on over $500 million in long-term debt.  Stockholders are strapped a significant deficit of $0.30 per share.

It looks like analysts following the Company see some hope on the horizon.  The consensus estimate for the current fiscal year ending December 2015, is a loss but the year 2016 is breakeven.  The thing is, the range of estimates for 2016 is so wide that it is apparent there is much to debate over Casella’s future.  Earnings per share estimates for the year 2016, range from a loss of $0.17 per share to a profit of $0.29 per share. 

In the near-term though, everybody pretty much agrees the Company will not report a profit.  It is this dismal prognosis that has JCP Investment up in arms and battling for as many as three seats at the table.  We will have to wait a while to find out whether the rest of Casella’s shareholders are prepared to support them.  Casella has postponed indefinitely its annual meeting previously scheduled for July 2015.  In the filing with the SEC to delay the meeting, Casella cited the timing of the last annual report in October 2014.  Casella has a nine-member board of directors with staggered three-year terms.  

The shareholder vote may have been delayed, but Casella management still has to face investors at the next earnings call on May 7th.  The Company is scheduled to release results for the quarter ending March 2015, on Tuesday May 6th after the market close.  Management is giving investors time to stew over results overnight and the stock will begin to trade before they get on the phone with investors to answer questions about the quarter results. 

There is a clear consensus on the March 2015 quarter.  There will be a loss.  Yet there is quite a range in viewpoint as to how deep that loss will be.  The average of the six estimates that have been submitted to Thomson Reuters is a loss of $0.19 per share on $118.7 million.  However, the range of estimates is wide, from a loss of just one penny to as much as $0.32 per share.  The analysts seem to have quite a disagreement on the level of sales, with the sales estimates ranging from $110.4 million to $141.4 million.  

The discrepancies in estimates might be symptomatic of management’s inability to explain its strategic vision to analysts.  Then again, if JCP Investment is correct, the problem is not investor relations.  The problem is that there is no strategic vision for Casella Waste Systems and that is a weak position to be in when there are hostile forces at the gate.


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


No comments: