On Dec 3, we downgraded our long-term recommendation for leading waste management company Republic Services, Inc. (RSG - Free Report) from Outperform to Neutral. The company’s diligent execution of operational plans and continuous inorganic and organic growth across the industry verticals augur well for its growth prospects. However, protracted weakness in special waste, industrial volumes and tight municipal budgets could weigh on the margins moving forward.
Why the Downgrade?
Margins are expected to remain constrained in the next quarters as Republic Services has more exposure to Collection services and less to Disposal services. Typically, the Disposal services generates the highest margins and the Collection services generates the lowest margin. Margin pressure remains a primary bottleneck for the company.
Volume growth is also expected to remain sluggish in the upcoming quarters due to sluggish macroeconomic conditions and increased competitive pressures. Therefore, soft volumes will be a headwind for Republic Services moving ahead.
However, Republic Services is the second largest domestic non-hazardous solid waste company in the U.S. The company is currently focusing on a series of quality acquisition opportunities, primarily of recycling assets, which is likely to act as a catalyst for the healthy long-term growth within its top 25 markets. This augurs well for its long-term growth prospects.
Republic Services continues to generate significant free cash flow, which is utilized for increased dividend payment, repurchasing shares and strategic acquisitions. Over the years, the company has returned significant cash to its shareholders as dividends or share repurchases. In addition, the company has also historically promulgated a conservative balance sheet with a healthy liquidity position. As such, we have a balanced neutral overview on the company.
Other Stocks to Consider
Republic Services has a Zacks Rank #3 (Hold). Other players in the industry worth considering include EnerSys (ENS - Free Report) and AO Smith Corp. (AOS - Free Report) , both carrying a Zacks Rank #1 (Strong Buy), and Rexnord Corporation (RXN - Free Report) that retains a Zacks Rank #2 (Buy).