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Is the Cleanaway share price a bargain?

Cleanaway Waste Management Ltd (ASX: CWY) shares were battered on Friday, at one point down more than 24% and hitting an intraday low of $1.64. The share price hounding came after the company downgraded earnings expectations for the first quarter of FY20.

With sustainable waste management and recycling becoming a more prominent issue and sector, is the Cleanaway share price a long-term buy?

What happened to the Cleanaway share price?

The Cleanaway share price took a dive last Friday after management warned shareholders at the company’s annual general meeting (AGM) that first-half earnings for FY20 would be below expectations.

Management cited the combination of lower economic activity and softer commodity prices as weighing factors. In addition, a new landfill levy of $75 per tonne in Queensland resulted in lower volumes of waste being transported from NSW to cheaper facilities interstate. As a result, first-half earnings are projected to be in line with the first quarter of the previous financial year.

Cleanaway saw earnings before interest and tax (EBIT) of $109.1 million and net profit of $60.8 million in the first half of FY19. Despite issuing a softer forecast for the first quarter, management reiterated that pricing and cost reductions would result in stronger full-year earnings for FY20.

How has Cleanaway performed?

Cleanaway is Australia’s largest waste management company, servicing households and industrial and commercial operations. The company operates 4,000 garbage trucks, recycles 320,000 tonnes of paper and cardboard a year in addition to 25,000 tonnes of aluminium and steel and 115 million litres of second-hand oil.

Cleanaway experienced a strong year of financial growth in FY19 with all 3 segments (solid waste, industrial waste and health services) experiencing growth in revenue and earnings. Group net revenue increased by 34.8% for the year to $2.1 billion and EBIT rose 44.7% to $240.8 million.

Earlier this month, the company acquired the assets of SKM Recycling Group for $66 million. SKM was the largest processor of recyclable household material, holding kerbside recycling contracts with more than 30 of the 79 councils in Victoria. The acquisition allows Cleanaway to add 5 more recycling sites to its current network and to take advantage of growing opportunities in the changing recycling sector.

Should you buy?

The Cleanaway share price is down more than 15% from is closing price last Thursday and could be a great long-term buy.

In my opinion, although the waste management sector is sensitive to broader trends in economic activity, recycling in Australia should increase as the country transitions to a circular economy. I do see value in the Cleanaway share price, however from a risk management perspective I think it would be unwise to jump the gun and buy shares in Cleanaway right away. Instead I would wait for the share price to consolidate and look for positive price action before making an investment decision.

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. 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.