Premier waste management firm Republic Services, Inc. (RSG - Free Report) is scheduled to report second-quarter 2016 results, after the closing bell on Jul 28.
Last quarter, the company posted a decent positive surprise of 2.13% as it marginally beat earnings by a penny. Notably, for the trailing four quarters, the stock posted an average positive surprise of approximately 2.51%. Let’s see how things are shaping up for this announcement.
Factors to Consider
Republic Services’ well structured business model has proved to be its strength, having driven healthy volumes, earnings, free cash flow and solid return on invested capital and cash returns to shareholders over a considerable period of time. Meanwhile, the company has made commendable progress with its multi-year strategic initiatives, which are expected to reduce costs. Republic Services’ cost structure is closely aligned to its “waste indices” which in turn have proved to be a major positive.
The company is currently focusing on increasing its operational efficiency by adopting compressed natural gas collection vehicles. It is also planning to replace rear-loading trucks with automated-side loaders to reduce costs and improve profitability. At the same time, Republic Services is focused on enhancing its operations by streamlining the cost structure, improving revenue quality and seeking growth through profitable investment opportunities.
In addition, the company is realigning its field support functions by combining two organizational layers into one. It expects these initiatives to result in approximately $25 million in annual cost savings from 2018. Over the years, the company has returned significant cash to its shareholders as dividends and/or share repurchases. Further, it has a history of maintaining a conservative balance sheet and healthy liquidity position.
However, margin pressure remains a bottleneck for the company. Margins are expected to remain constrained over the next few quarters as Republic Services has more exposure to Collection services and less to Disposal services. Typically, Disposal services generate the highest margins while Collection services clock the lowest margins.
Republic Services’ recycling operations process certain recyclable materials for sale, including fibers, aluminum and glass, all of which are subject to significant market price fluctuations. The company is expected to face commodity price headwinds in the future as well, which will likely have a negative year-over-year impact on earnings.
Our proven model does not conclusively show that Republic Services is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) and #3 (Hold) for this to happen. This is not the case here as you will see below:
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently 0.00%.
Zacks Rank: Republic Services currently carries a Zacks Rank #2 which when combined with a 0.00% ESP makes surprise prediction difficult.
Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revision.
Stocks That Warrant a Look
Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Arctic Cat Inc. , earnings ESP of +12.50% and a Zacks Rank #3.
Cabot Oil & Gas Corporation (COG - Free Report) , earnings ESP of +12.50% and a Zacks Rank #2.
Casella Waste Systems Inc. (CWST - Free Report) , earnings ESP of +20.00% and a Zacks Rank #3.
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