Republic Services: Trash to Treasure?

11/24/2020 5:00 am EST

Focus: INDUSTRIALS

David Coleman

Quantitative Portfolio Strategist, Argus Research

Republic Services (RSG) is a fully integrated waste management company, with operations ranging from waste collection and compacting to recycling and renewable energy generation, explains analyst David Coleman of Argus Research.

We believe that RSG is poised for a continued share price recovery as the U.S. economy recovers. The company recently reported 3Q results that topped expectations. Management updated its 2020 guidance. The company expects to generate free cash flow of $1.15-$1.2 billion for the year, up from prior guidance of $1.1-$1.175 billion.

Management specified that the guidance assumes continued gradual improvement in economic activity through the remainder of the year. Adjusted free cash flow was $1.109 billion in the first nine months. The company expects full-year adjusted diluted EPS of $3.37-$3.40.

The company scores high on profitability — its 3Q EBITDA margin was 30.3%. The company had $8.8 billion in total debt, and the debt/total capitalization ratio was 5%. RSG pays a dividend of $0.425 per share, or $1.70 annually, for a yield of about 1.7%.

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 $850-$950 million, up from its previous guidance of $600-$650 million in acquisitions for the full year.

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.

We think that RSG shares are attractively valued. From a technical standpoint, prepandemic the shares had been in a bullish pattern of higher highs and higher lows that dated to 2016. Since the pandemic lows, the bullish pattern has returned.  Our rating remains "buy".

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