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Hi analyst99

Thanks for your comments.

When I'm looking at these companies, rightly or wrongly, I tend to look through the income statement to the underlying cash flows. I just feel there is less estimation uncertainty and judgement involved than there is in determining how much of the debt to amortise in a given period.

If you compare how the different companies in this sector effectively amortise their books you see some quite different results. For example CCP appears to amortise at a much faster rate than CLH and thus leaves less on the balance sheet. The more on the balance sheet the more risk there is that the future cash flows estimated don't arise and at some point robbing Peter to pay Paul catches up with you. While I can't be 100% confident and it is clearly an opinion and not fact (which may or may not be shared by others), I have a hard time reconciling the the longer term cash flow trends and return multiples I see to the amortisation rate used by the company.

For example: the inverse of the amortisation rate of 45% (per the latest reporting) gives an ultimate lifetime return of around 2.22 times initial investment (i.e. over the life of a debt this would imply cash inflows [undiscounted] of $2.22 for every dollar invested). This is the number I can't reconcile to when I break down the returns into discrete time periods (add up the individual lines on my graph). While I am working with estimates and conjecture, the gap I can't explain is bigger than I would expect. In the absence of someone else being able to explain it to me and link the longer term historical cash flows to the rates used to amortise, which has a large impact on the Income Statement and thus metrics like P/E, it makes me believe the amortisation rate is on the aggressive end (read: not enough). I'm not saying it's not supportable, after all the numbers are audited and management and the auditors have much more data than us, but it makes me feel uncomfortable.

The above is to some extent why I ignore the Income Statement and focus on the cash flows, vintage profiles in the investor presentations, size of payment arrangement book and overall book. This information is much harder to manipulate. My own models work off of the cash flows to generate a discounted cash flow valuation rather than assessing earnings etc. I also look at the size of the balance sheet carrying amounts compared to the cash flows they are generating to do some peer analysis etc. Same with the returns on investment I do some peer analysis for relativity between the companies in the sector. Discounted cash flow models are no more certain than other valuation methods and there can be false safety in having more detail, but there are some connections I can't make that lead me to rate down the stock from my own perspective.

Happy to be proved wrong and obviously there will be a heap of other opinions on the matter, but that's my own at least. Once again I hope that it goes to the moon for those that do hold as currently I'm neither long nor short.

All that said there are some positive underlying signs, it is just whether you're prepared to pay the price on offer. Over the short term the market appeared to have wanted more and time will tell whether it arrives. I agree with you that I think there needs to be more positive signs to get rerated and maybe that will come later in the year.

DYOR