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Environmental cleanups haven't been grabbing many headlines recently. But on Wall Street, several smart-money types see some environmental stocks as attractive growth and defensive plays in the uncertain economic climate. One of them is investment pro Andrew Lanyi, of Lanyi Research at CIBC Oppenheimer, who is high on TRC Cos. (TRR
), a Big Board-listed provider of environmental management services.
This company, however, isn't your run-of-the-mill cleanup outfit: "TRC has radically altered the way corporations approach pollution problems," says Lanyi, who is impressed with its sustained sales and earnings growth over the past five years.
TRC's stock has been holding up well since its drop from 54 a share in mid-June to 30 on Sept. 21, generally considered the market's low point after the September 11 attacks. It has since rebounded to 44, and Lanyi rates the stock a strong buy.
"RISK-FREE SOLUTION"? TRC has kicked off a novel high-margin business: It has devised a so-called Exit Strategy program for the private and public sectors, in which TRC takes full responsibility for cleaning up a customer's contaminated sites. Through TRC's combination of environmental and financial knowhow, corporations or government agencies can now walk away from contaminated sites "knowing that TRC will provide a cost-effective and risk-free solution" for any pollution problems they face, says Lanyi.
Historically, companies with polluted facilities struggled at high expense to clean them up effectively. At the same time, they faced huge legal liabilities, making environmental toxic problems a costly major distraction for many companies. One TRC customer with such a problem was Con Edison, which had an outdated power plant in New York City. Last year, Con Ed signed up for Exit Strategy, giving TRC the job of fixing any environmental damage that the plant has wrought.
The contract, worth $103.5 million, was backed by an insurance policy from giant American International Group (AIG
). TRC protects its customers, says Lanyi, through a one-of-a-kind alliance with AIG. The insurer also helps market Exit Strategy to its own corporate clients, he adds. Lanyi pegs the potential market of TRC's program at $120 billion.
BIG-NAME CLIENTS. Before signing Exit Strategy contracts, TRC engineers study the sites throughly and assess the amount of fees that would cover the cleanup costs, making sure TRC could retain healthy profit margins, says Hermant Wadhwa, an analyst at Lanyi Research. "The business has been expanding rapidly, and it now accounts for nearly half of the company's backlog, and about 65% of revenues," says Wadhwa.
TRC also provides technical, financial risk-management, and construction services to its clients. "TRC CEO Richard Ellison has made sure that there is more to TRC than Exit Strategy," says the analyst.
Among TRC's major clients: General Electric, General Motors, Duke Energy, Mobil, Lockheed Martin, and Unocal in the private sector, In government, customers include New York City's Transportation Dept., Parks Dept., and School Construction Authority. Among federal clients are the Defense Dept., Environmental Protection Agency, and Federal Aviation Agency.
PRICEY TARGET. Other major companies in the environmental cleanup business include URS Corp. (URS
) and IT Group (ITX
). But they don't have programs similar to Exit Strategy, says Wadhwa.
Lanyi figures TRC will earn $1.13 a share this year on revenues of $124.2 million, $1.79 in 2002 on sales of $166.2 million, and $2.29 on $219.5 million in 2003. The company earned 65 cents on sales of $84.8 million in 2000. His price target for the stock: 120 in two years.
Also high on TRC is Michael Shonstrom of Shonstrom Research Associates, who rates the stock a buy. His earnings estimate for 2002 and 2003 are higher: $1.92 a share and $2.62, respectively.
If these analysts are right about the potential of TRC's Exit Strategy, the company could be entering an era of great growth in a neglected industry.
Copyright 2001, Bloomberg L.P.
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