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Is the Cleanaway share price a good buy on the ASX 200?

Cleanaway Waste Management Ltd (ASX: CWY) shares are listed on the S&P/ASX 200 (INDEXASX: XJO) index, with an American depository receipt listed in the United States (US).

In the company’s own words it “operates a national network of unique collection, processing, treatment and landfill assets from over 200 locations across Australia.” The company’s philosophy is that “all waste is a resource and it aims to incorporate recovery, recycling and reuse throughout its operations.”

The Cleanaway numbers

For the half ended 31 December 2018, Cleanaway reported the following results:

  • 4% increase in net revenue
  • 6% increase in net profit after tax
  • 9% increase in earnings per share; and
  • the company was able to increase the interim dividend by 50% thanks to a 55.7% increase in cash from operating activities.

Shares rose significantly on the day of the result and currently trade on a valuation of 39x earnings. Despite the 50% hike in the dividend, the yield is sitting at 1.37% (or 1.96% grossed up).

The big picture

Cleanaway is one of the best performing ASX 200 stocks in 2019, spurred on by the company’s impressive half-year result. However, only in recent years has it been a strong performer. Over the last five years the company’s share price has grown at an outstanding compound annualised rate of 16.6%, excluding dividends. However, stretch the period out over 10 years and the annualised rate reduces to 7.1%, excluding dividends.

The recent share price appreciation corresponds with compound annual growth rates of 6.3% for net revenue and 23.7% for earnings per share across the last four years. The 2018 acquisition of healthcare-industry focused Tox Free Solutions Limited and strong organic performance of the company should see continued growth in earnings going forward, aided by the consistent nature of the industry.

Foolish bottom line

Cleanaway is currently trading at an expensive valuation to the market. With the recent increase in volatility, and given we are 10 years into a bull market, some investors maybe looking to diversify their portfolios into more defensive stocks. As Australia’s largest total waste management solutions company, Cleanaway’s growing earnings are somewhat protected when the economy slows. Although consumption growth may slow, or even regress, waste still needs to be collected.

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Motley Fool contributor Proutlb95 has no position in any of the stocks mentioned and expresses his own opinions. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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