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Republic Services Down to Hold on Competition, Margin Woes
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On May 24, Zacks Investment Research downgraded Republic Services, Inc. (RSG - Free Report) to a Zacks Rank #3 (Hold).
Republic Services is 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 through a network of 338 collection companies in 39 states and Puerto Rico. The company owns or operates 200 transfer stations, 193 solid waste landfills, 69 landfill gas and renewable energy projects and 66 recycling facilities. Republic Services manages its operations through four geographic operating segments: Eastern, Midwestern, Southern and Western.
The stock has outperformed the Zacks categorized Waste Removal Services industry in the last three months with an average return of 1.7% compared with 0.2% gain for the latter. The company is currently focusing on a series of quality acquisition opportunities, primarily of recycling assets, which are likely to act as a catalyst for a healthy long-term growth within its top 25 markets. Republic Services is also transitioning to a fee-based recycling processing model to cover processing costs and generate a healthy ROI (return on investment).
The company is also focusing on increasing its operational efficiency by converting to compressed natural gas collection vehicles and conversion of rear-loading trucks to automated-side loaders, which will reduce costs and improve profitability. Republic Services is focused on enhancing its operations by streamlining cost structure, improving revenue quality and seeking growth through profitable investment opportunities. The company is realigning its field support functions by combining two organizational layers. It expects these initiatives to contribute approximately $25 million of annual cost savings from 2018. As part of the realignment program, the company centralized the management structure for recycling operations. The new organizational structure is likely to ensure a clear ownership for the recycling and processing market vertical. All these factors offer a solid investment proposition for the company.
However, margin pressure remains a bottleneck for the company as Republic Services has more exposure to Collection services and less to Disposal services. Typically, the Disposal services generate the highest margins and the Collection services generate the lowest. The company’s performance is likely to be hurt by protracted weakness in special waste, industrial volumes and tight municipal budgets. In addition, increased competitive pressure is also a cause for concern for the company. All these factors could further impact the profitability of Republic Services.
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 owing to market volatility, which will likely have a negative year-over-year impact on earnings.
Waste Management is currently trading at a forward P/E of 22.3x. It has a long-term earnings growth expectation of 9.5%.
Waste Connections has a long-term earnings growth expectation of 15.8%. It is currently trading at a forward P/E of 29.9x.
Advanced Disposal is currently trading at a forward P/E of 43.3x.
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Republic Services Down to Hold on Competition, Margin Woes
On May 24, Zacks Investment Research downgraded Republic Services, Inc. (RSG - Free Report) to a Zacks Rank #3 (Hold).
Republic Services is 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 through a network of 338 collection companies in 39 states and Puerto Rico. The company owns or operates 200 transfer stations, 193 solid waste landfills, 69 landfill gas and renewable energy projects and 66 recycling facilities. Republic Services manages its operations through four geographic operating segments: Eastern, Midwestern, Southern and Western.
The stock has outperformed the Zacks categorized Waste Removal Services industry in the last three months with an average return of 1.7% compared with 0.2% gain for the latter. The company is currently focusing on a series of quality acquisition opportunities, primarily of recycling assets, which are likely to act as a catalyst for a healthy long-term growth within its top 25 markets. Republic Services is also transitioning to a fee-based recycling processing model to cover processing costs and generate a healthy ROI (return on investment).
The company is also focusing on increasing its operational efficiency by converting to compressed natural gas collection vehicles and conversion of rear-loading trucks to automated-side loaders, which will reduce costs and improve profitability. Republic Services is focused on enhancing its operations by streamlining cost structure, improving revenue quality and seeking growth through profitable investment opportunities. The company is realigning its field support functions by combining two organizational layers. It expects these initiatives to contribute approximately $25 million of annual cost savings from 2018. As part of the realignment program, the company centralized the management structure for recycling operations. The new organizational structure is likely to ensure a clear ownership for the recycling and processing market vertical. All these factors offer a solid investment proposition for the company.
However, margin pressure remains a bottleneck for the company as Republic Services has more exposure to Collection services and less to Disposal services. Typically, the Disposal services generate the highest margins and the Collection services generate the lowest. The company’s performance is likely to be hurt by protracted weakness in special waste, industrial volumes and tight municipal budgets. In addition, increased competitive pressure is also a cause for concern for the company. All these factors could further impact the profitability of Republic Services.
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 owing to market volatility, which will likely have a negative year-over-year impact on earnings.
Some better-ranked stocks in the industry include Waste Management Inc. (WM - Free Report) , Waste Connections Inc. (WCN - Free Report) and Advanced Disposal Services, Inc. . All three stocks carry a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Waste Management is currently trading at a forward P/E of 22.3x. It has a long-term earnings growth expectation of 9.5%.
Waste Connections has a long-term earnings growth expectation of 15.8%. It is currently trading at a forward P/E of 29.9x.
Advanced Disposal is currently trading at a forward P/E of 43.3x.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana. Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look. See the pot trades we're targeting>>