One of the attractive investment features regarding the leading companies in the Waste Disposal/Collection Industry is the stellar earnings predictability of companies such as Waste Management (WM), Republic Services (RSG), and Waste Connections (WCN). This showing largely reflects recurring revenue streams, particularly from waste-disposal contracts with municipalities. These volumes traditionally account for about 70% of large waste hauling and landfill operations, while much of the balance consists of industrial and construction waste.
Also, the industry appeals to investors interested in “green’’ companies, i.e. those that are deemed to have a positive impact on the environment. The most notable example is Waste Management. In addition to running one of the largest recycling operations (mainly focused on used paper and corrugated cardboard), the company’s Wheelabrator subsidiary has a sizable chain of waste-to-energy facilities. The industry has also caught the eye of arguably the country’s premier “value’’ investor, Warren Buffet, who, through Berkshire Hathaway (BRKA), has recently increased his stake in Republic Services. This move, in effect, follows a similar investment pattern by his friend, Bill Gates, Microsoft’s (MSFT) chairman.
The operating environment of this industry is likely to improve this year. In 2005, a strengthening economy began to lift waste volumes generated by industrial and commercial customers, and this trend continued until 2008’s fourth quarter. Due mainly to the economic malaise that surfaced at that time, volumes have been well below prior year’s levels during the past five quarters. On the other hand, average price increases of about 4%, excluding surcharges, have persisted in the last three years. Overall hikes will likely be in a range of 2% to 4% in 2010. Ongoing industry consolidation, which has reduced the number of major players in this industry from nine to three over the past ten years or so, is contributing to the easing of pricing pressures. New efficiencies and the implementation of several service/environmental fees helped to improve operating margins in 2009. Moreover, solid earnings rebounds, particularly at Republic Services and Waste Connections, appear to be in the cards this year.
Indeed, Republic Services seems to be doing an excellent job of integrating the Allied Waste operations that it acquired in December, 2008 for $4.4 billion in stock. Management expects annual cost savings of $165 million to $175 million by the close of 2010. Under merger terms stipulated by the Department of Justice, Republic completed the sale of a number of collection routes, transfer stations, and landfills in mid-2009 to Waste Connections. Due to the divestiture requirement, and a dearth of qualified buyers, WC should reap an above-average return on this investment. It also purchased the largest privately owned waste-collection company in Oregon in 2009’s third quarter. Too, Waste Management recently initiated an acquisition program that is focused on waste-to-energy operations. Notably, it purchased a 40% interest in a Chinese company. WM plans to acquire similar operations in Europe shortly, as well as expand the number of Wheelabrator’s waste-to-energy sites.
Two other waste-disposal companies in specialized areas are of interest. Stericycle (SRCL) is one of the largest providers of regulated medical waste management services in the U.S., and its growth prospects in foreign markets are bright. Owing to the costs involved in upgrading existing waste-treatment facilities, many laboratories and hospitals are using Stericycle’s outsourcing services to comply with more stringent regulations. Also, US Ecology (ECOL) is a leader in the area of radioactive and other hazardous waste disposal. Although much of the funding for waste-remediation work related to the American Recovery and Remediation Act (ARRA) was deferred in 2009, the company should benefit from the start of these high-margined projects during 2010. Given the company’s competitive advantages relating to both disposal capacity and technological expertise, it is in an excellent position to garner large awards for this work.