The broad economic recovery is doing good things for Harsco’s (HSC) numbers, but the number that most shareholders care most about, the share price, isn’t seeing the same benefit yet. The shares are up since my last article on the company, but the 6% rise lags that of the S&P 500 and the broader industrial sector.
I remain modestly concerned that the Street is going to treat this like a short-cycle stock, and I note that the trading action of the shares on a year-to-date basis resembles that of Kennametal (KMT), Parker Hannifin (PH), and Sandvik (SDVKY) – stocks where there is an established historical pattern of institutional rotation away when the manufacturing PMI exceeds 55.
I don’t think Harsco should trade that way. While I do see some risk that the Environmental business is at or near a peak, it could turn out to be more of a plateau as strong demand keeps steel mills busier for longer. With Clean Earth and Rail, I think there are still more significant improvements in underlying business to come. If Harsco can generate a long-term revenue growth rate around 5%-6% and get FCF margins up into the high single-digits, I see near-term upside into the low-$20’s and high single-digit long-term annualized returns after that.
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