We reiterate our Neutral recommendation on Republic Services Inc. (RSG - Analyst Report), the second largest domestic non-hazardous solid waste company in the U.S. It provides non-hazardous solid waste disposal services for commercial, industrial, municipal and residential applications. The company manages its operations through four geographic operating segments: Eastern, Central, Southern and Western.
Republic Services released its fourth quarter 2011 financial results on February 9, 2012. The company reported earnings of 53 cents per share, outperforming the Zacks Consensus Estimate of 45 cents per share.
Results were 26% above the year-ago earnings of 42 cents per share. Total sales remained flat at $2.02 billion, falling short of the Zacks Consensus Estimate of $2.03 billion.
The company expects sales to increase in the range of 1.5 to 2.0% for 2012. Adjusted EPS is envisioned in the range of $1.98–$2.02 and free cash flow in the range of $775 million to $800 million.
Republic Services has invested considerably in order to enhance its capability in recycling centers. It invested nearly $46 million in 2011 to develop and upgrade these centers. Furthermore, Republic Services intends to invest an additional $60 million in 2012. These measures are expected to increase the recycling volume by nearly 12% over the next 18 months.
In the collection line of business, volumes improved 20 basis points sequentially. It included a positive increase in the Industrial business and a slightly negative volume in the commercial business. Republic Services has guided that volumes will improve by 0.5% in 2012. Looking ahead, we expect volumes across all lines of business to continue to improve.
However, the company plans to invest extensively in certain areas in 2012. For example, capacity improvement in recycling centers, automation of the residential fleet and conversion of the fleet into CNG from diesel. These initiatives are capital intensive and are therefore expected to pressure margins.
Moreover, increasing fuel costs affected margins during the fourth quarter of 2011 when fuel price rose to 23%. The average price per gallon of diesel increased to $3.87 in the fourth quarter compared with $3.14 in the year ago quarter. As a result, the fuel recovery cost increased 1%. If fuel prices remain at this level, Republic Services will face margin headwind for the balance of the year.
We currently have a long-term Neutral recommendation on Republic Services. The stock retains a short-term Zacks #4 Rank (Sell). It competes with the companies like Waste Management Inc. (WM - Analyst Report) and the privately held Waste Industries USA, Inc.