Companies of all sizes are continually searching for ways to reduce their environmental impact, and waste disposal is a major component of that. Customers and investors are increasingly factoring in Environment, Social, and Governance (ESG) factors into purchase decisions. One industry that has particularly acute disposal needs is the automotive service sector, as they deal with oil, antifreeze, and wastewater that must be properly disposed of. A company that caters to this industry in particular, but also to the industrial and manufacturing sector as a whole, is Heritage-Crystal Clean (NASDAQ: HCCI), a $684 million market cap, specialty waste management company headquartered out of Elgin, Illinois.
Heritage-Crystal Clean provides numerous environmental services to customers, including oil collection and recycling, parts cleaning, wastewater collection and disposal, waste management, and antifreeze disposal. For oil specifically, the company collects it, sells recycled fuel oil, re-refines oil into lubricant bases, and provides disposal of oil filters. HCCI operates with 91 branch locations and has a customer base of approximately 95,000 small and medium-sized businesses.

Given its small size and specialized industry sector, Heritage-Crystal Clean is not widely followed by analysts, with only three firms currently providing coverage. Of those three firms, two have a Strong Buy rating on the stock and the third has a Buy rating, and the average price target is $38 per share. At current trading levels of about $30, investors could see potential gains of more than 25% if those analysts are correct.
Within the waste management industry sector, Heritage-Crystal Clean has margins that outpace the industry averages. On the gross margin side, HCCI is slightly better at 31.5% vs. the industry mark of 31.3%. Net margin is where the company shines, however, with an 11.8% net profit vs. the industry average of 5.4%, Heritage-Crystal Clean appears to be operating more efficiently than other firms in the industry.
With an EV/EBITDA ratio of just 6.7, HCCI looks undervalued compared to other companies within the sector of similar market cap sizes such as Casella Waste Systems (NASDAQ: CWST) at 27.5, US Ecology (NASDAQ: ECOL) at 15.3, and Montrose Environmental (NYSE: MEG) with an EV/EBITDA of 39.2. Heritage-Crystal Clean saw sales growth of 26.9% over the past year, so if that pace continues and the company was to be valued at a similar EV/EBITDA as its peers, investors could be in line for some nice upside potential.

With both new and used cars seeing sky-high prices in recent months, drivers will probably choose to keep their existing vehicles as long as possible, driving up demand for automotive services. This in turn will create a growing market among Heritage-Crystal Clean’s existing customer base. Coupled with the focus on proper disposal of waste, particularly waste created from fossil fuels, HCCI could be the beneficiary of the convergence of several macroeconomic trends. This small and lightly followed company could be a hidden gem for investors at current price levels.
Disclosure: No position. Spotlight Growth has no relationships with any of the companies mentioned in this article and did not receive payment in any form for its creation. This is an opinion article and is not meant to be financial advise. We are not broker-dealers or investment professionals. Please conduct your own due diligence. For more information on our disclosures, please visit: https://spotlightgrowth.com/disclosures/