JCP Investment Management recently filed an amended 13D with the SEC concerning Casella Waste Systems Inc. (NASDAQ:CWST). The investment firm, based in Houston, Texas, disclosed ownership of 5.4% of Casella’s outstanding stock, amounting to just under 2.11 million shares. That represents an increase from the 1.98 million shares reported in a 13D filing one month ago. Along with the filing JCP included an open letter sent to Casella’s board of directors. Among other things, JCP mentioned its desire to have three candidates elected to the company’s board. We believe if JCP succeeds in its activist campaign, Casella shares will outperform the broader indices.
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JCP has invested in Casella Waste Systems Inc. (NASDAQ:CWST) since March of 2010. The firm is managed by James Pappas, who has steadily built his reputation as an activist shareholder. Recently he worked with Glenn Welling‘s Engaged Capital on a campaign involving Jamba Inc. (NASDAQ:JMBA) which resulted in both Pappas and Welling being elected to that company’s Board of Directors.
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Pappas is also one of JCP’s current nominees for Casella’s Board, along with Brett Frazier and Joseph Swinbank. JCP claims a shake-up of Casella’s Board is needed. It is frustrated with the “chronic underperformance” and the “unwillingness” of the current board to enhance shareholder value. The fund claims multiple potential strategic acquirers have already contacted it expressing interest in Casella, and JCP wants Casella to hire an investment bank to explore these strategic alternatives.
Casella Waste Systems Inc. (NASDAQ:CWST) is a small waste services company based in Vermont with operations in six states in the Northeast. For its fiscal year 2014 the company achieved $530 million in revenues. Shares of Casella are cheap, but for a reason: Casella is trading at 2.0 times EBITDA because it has a ton of debt. Debt-to-EBITDA at the end of the first quarter was about 5.5 times. Compare this with the larger waste services companies like Waste Management, Inc. (NYSE:WM) and Republic Services, Inc. (NYSE:RSG), which have debt-to-EBITDA figures of 2.6 times and 3.2 times respectively. Keep in mind, Waste Management has a $23 billion market cap, while Republic Services’ stands at $6 billion, and Casella’s at just $220 million.
Casella has a heavy debt load but the company is projecting $14 to $18 million in free cash flow for 2015. For the remainder of the year, the company will focus on increasing cash flow and reducing debt so margins will improve. We believe if JCP can get the company to make the necessary changes, shares will appreciate. Likewise, if JCP can help push the company towards a sale, that will likewise result in a strong return for shareholders.
Out of the funds we track, Peter Keane’s Keane Capital Management is the largest investor in Casella Waste Systems with almost 770,000 shares valued at $4.2 million as of March 31. George McCabe’s Portolan Capital Management and John Zaro’s Bourgeon Capital also have stakes in Casella.
Disclosure: None
