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Garbage to Gains
05/19/2006 12:00 am EST
"Every year, US consumers generate 240 million tons of non-hazardous waste products, and some 70% is destined for disposal in the nation’s landfills," notesElliott Gue in Personal Finance. Here, he looks at five favorites that turn "garbage" into "gains."
"Americans are generating more trash than ever. That steadily growing pile of waste may be a headache for towns and cities, but it’s music to the ears of a handful of companies that handle waste processing, transportation, and storage. The waste management industry generates steady fees for hauling trash from individual homes and municipal dumpsters to landfill sites for long-term disposal. Better still, even when the economy slows, consumers continue to produce trash; cash flows for the industry tend to be reliable and recession-resistant.
"The key to profitability in the industry is landfill capacity. Federal, state, and local governments tightly regulate landfill disposal permitting—it’s a time-consuming and expensive process that routinely encounters opposition from local residents. That severely limits growth in available landfill capacity. Landfill owners typically charge a tipping fee for depositing waste on their sites and an additional fee for processing.
"With landfill capacity in short supply, tipping fees have been on the rise and haulers with insufficient capacity have seen profit margins squeezed. Conversely, companies with plenty of excess capacity have enjoyed rising fees for handling third-party disposal. The nation’s largest trash hauler, Waste Management (WMI NYSE), owns nearly 40% of total US landfill capacity—283 sites located all across the country.
"Those landfills on average have 26 years of capacity remaining. And better still, the company is in the process of expanding 65 of its existing landfills, a move that will push up average capacity to 35 years. As a result, WMI is able to dispose of roughly two-thirds of the trash it collects internally, among the highest ratios in the industry. It also wins points for increasing prices and holding down costs.
"To offset rising diesel fuel costs for running trash trucks, Waste Management imposed hefty fuel surcharges on customers. The result: profit margins have been rising steadily over the past few quarters and currently stand at a healthy 14%. Generating nearly $2.5 billion in free cash flow annually, the company has plenty of financial flexibility to offer a 2.5% dividend yield and an aggressive share repurchase program. Buy under 40.
"Like Waste Management, Waste Connections (WCN NYSE) benefits from a solid network of landfills nationwide—68% of its throughput is stored in company-owned landfills. Even better, Waste Connections has been highly acquisitive in recent years, buying up smaller collection firms operating in small towns and rural markets. Larger firms typically ignore these smaller markets, giving Waste Connections a near-monopoly position in many cases.
"In recent years, the waste management industry has become increasingly concentrated in the hands of a few key national players. Smaller private firms just can’t put together the networks of landfill and trucking capacity to remain profitable. This fits in well with Waste Connections’ acquisition strategy—it’s been able to profitably grow its business by acquiring small, inefficient firms and integrating them into its existing nationwide infrastructure. WCN is a buy under 45.
"Republic Services (RSG NYSE) has traditionally lagged our other two picks in landfill capacity. But in recent years, it’s steadily increased capacity by siting new landfills and winning permits to expand existing sites. As a result, more than 56% of collected waste is handled internally and margins have been steadily improving. And the company has been enjoying a strong pricing market, due in large part to its strong exposure to fast-growing states such as Florida and Nevada. RSG rates a buy under 47.50.
"Every year the US generates some 30 million tons of hazardous waste that requires special treatment. Examples of hazardous waste include low-level radioactive materials from nuclear power plants and petroleum wastes generated at oil refiners and chemical plants. American Ecology Corp. (ECOL NASDAQ) specializes in the treatment and disposal of such hazardous wastes. The company owns a total of four operating hazardous disposal sites around the US.
"Roughly half of revenues come from one-off clean-up projects such as a project to clean up hazardous chemicals from the bottom of the Hudson River. Yet Ecology’s management has also been working to boost revenues from recurring projects—mainly long-term contracts with refiners and steelmakers to haul hazardous wastes. While profit margins may not be as high on such ongoing contracts, they offer steady, solid revenues. Buy American Ecology under 29.
"Another major player in the hazardous waste market is Clean Harbors (CLHB NASDAQ). It has a particular specialty in cleaning up oil and chemical spills; with US oil refiners and chemical plants operating at near full capacity, spills are more common. In addition, Clean Harbors is a major contractor for hurricane-related clean-up work along the Gulf Coast. Buy Clean Harbors under 30."
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