Republic Services: Treasure in Trash

09/08/2020 5:00 am EST


David Coleman

Quantitative Portfolio Strategist, Argus Research

Republic Services (RSG) is the second-largest domestic provider of nonhazardous waste services, as measured by revenue; the company serves 14 million customers with operations in 41 states, explains David Coleman, an analyst with Argus Research.

Republic is a fully integrated waste management company, with operations ranging from waste collection and compacting to recycling and renewable energy generation.

Management has reinstated its 2020 guidance. The company expects to generate free cash flow of $1.1-$1.175 billion for the year. Management specified that the guidance assumes continued gradual improvement in economic activity through the remainder of the year. Adjusted free cash flow was $743 million in 2Q20.

The pandemic has had an impact on results. In 2Q20, RSG was able to quickly adjust collection routes for changes in demand and reduced overtime by 25% from the prior year.

Residential weights were up 10% from the prior year. Weights tapered down during the quarter and by June, residential weights were up 8%.

RSG has a growth-by-acquisition strategy in the fragmented waste hauling industry. The company invested $124 million in acquisitions in 2Q20. It expects to invest $600-$650 million in acquisitions for the full year.

Based on volume trends, management’s focus on costs and comments about recent business conditions, we are raising our 2020 adjusted diluted EPS estimate to $3.15 from $3.08.

Our estimate implies a year-over-year EPS decline of 6%. We look for growth to resume in 2021 and are raising our adjusted diluted EPS estimate to $3.55 from $3.52. Our five-year earnings growth rate forecast is 7%.

We believe that RSG is poised for a continued share price recovery as the U.S. economy recovers. From a technical standpoint, pre-pandemic the shares had been in a bullish pattern of higher highs and higher lows that dated to 2016.

On valuation, we believe this well-run company deserves to trade at a premium to historical average multiples based on its solid balance sheet, focus on growth through acquisitions, and industry position.

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