Premier waste management firm Republic Services, Inc. (RSG - Free Report) is scheduled to report second-quarter 2017 results after the closing bell on Jul 27.
In the last reported quarter, the company’s adjusted earnings beat the Zacks Consensus Estimate by 2 cents. Over the trailing four quarters, the stock beat estimates thrice with an average positive surprise of 3.58%.
Let’s see how things are shaping up for this announcement.
Key Factors to Consider
Republic Services has significantly expanded its product offerings in the e-commerce platform to address the evolving needs of the customers. This low-cost sales channel is likely to witness higher earnings in the quarter. In addition, the company improved the capabilities and functionality of the customer portal and mobile app with the enrolment of over 1.8 million customers. These value-driven interactive features are likely to lead to incremental orders and higher revenues in the to-be-reported quarter.
At the same time, Republic Services is focusing on increasing operational efficiency by converting its fleet to compressed natural gas collection vehicles and modifying rear-loading trucks to automated-side loaders, which will reduce costs and improve profitability. 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. Republic Services is also transitioning to a fee-based recycling processing model to cover processing costs and generate a healthy ROI (return on investments).
Furthermore, 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, it also historically promulgated a conservative balance sheet with a healthy liquidity position.
However, margin pressure remains a bottleneck for the company. Margins are expected to remain constrained in the impending quarter 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 also likely to be hurt by protracted weakness in special waste, industrial volumes and tight municipal budgets. In addition, increased competitive pressure remains a cause of concern for the company.
Our proven model does not conclusively show that Republic Services is likely to beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 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 Zacks Consensus Estimate, is 0.00% as both are currently pegged at 59 cents You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Republic Services has a Zacks Rank #2. While this increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise.
Note that we caution against stocks with a Zacks Rank #4 or #5 (Sell-rated) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.
Stocks to Consider
Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Waste Management Inc. (WM - Free Report) has an Earnings ESP of +1.22% and a Zacks Rank #2.
Och-Ziff Capital Management Group LLC (OZM - Free Report) has an Earnings ESP of +50.00% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
OM Asset Management plc has an Earnings ESP of +2.63% and a Zacks Rank #2.
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