Baird Upgrades Heritgage Crystal Clean As 'Worst Base Oil Spreads Are In The Past'

• Heritage-Crystal Clean, Inc. HCCI shares have declined 19.26 percent in the last three months, hitting a low of $9.78 on October 14.
• Baird’s David J. Manthey has upgraded the rating on the company to Outperform, with a price target of $18.
• The company has posted robust Q3 results and Manthey expects the stock to outperform going forward.

Analyst David Manthey explained that the strong Q3 performance was driven by consistently robust ES growth, along with “further progress in OB used oil programs,” which has increased confidence that “the worst base oil spreads are in the past.”

According to the Baird report, the Q3 upside reflects “solid execution,” with higher-than-expected EPS, despite the low base oil prices, which led to an inventory write-down for the fourth quarter in a row.

Manthey believes, however, that the company is well positioned to cope with sustained low base oil prices. “Management indicated the company was able to go from pay-for-oil to a net charge-for-oil position by the end of 3Q15, which signals an important psychological threshold for the company and industry,” Manthey stated.

In addition, the integration of FCCE was almost complete at the end of 3Q15, with the net synergies having been achieved much earlier than expected. The cross-selling potential to legacy FCCE customers is likely to drive continued robust ES performance, which management expects would grow organically in the double digit range.

“Going forward, we believe stable to improving profitability in the OB, augmented by contributions from the FCCE acquisition and a discounted valuation should lead to sustained outperformance, regardless of oil price direction,” Manthey elaborated.

The EPS estimates for 2015 and 2016 have been raised to $0.36 and $0.80, respectively.