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WM or RSG: Which Waste Removal Stock is Better Positioned?

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The waste management industry is firmly tied to the health of the broader economy, which is currently quite favorable on the back of improving employment scenario, robust manufacturing and non-manufacturing activities along with Trump administration’s business friendly approach. Furthermore, increasing demand for renewable energy and solid waste recycling have opened up revenue generation opportunities for this industry.

Per a report, the global waste management industry is projected to reach $435 billion by 2023, witnessing a CAGR of 6.2% from 2017 to 2023. The buoyancy in the waste management space is further confirmed by its Zacks Industry Rank in the top 23% (59 out of the 250 plus groups).

Given the promising developments in the industry, it is not a bad idea to undertake a comparative analysis of two waste removal services stocks – Waste Management WM and Republic Services (RSG - Free Report) . Both the stocks are part of the broader Business Services sector (one of the 16 Zacks sectors). While Waste Management has a market capitalization of $38.85 billion, Republic Services’ market cap is $23.82 billion.

As both the stocks carry a Zacks Rank #3 (Hold), we are using certain other parameters to give investors a better insight. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance

Waste Management clearly scores over Republic Services in terms of price performance. Shares of Waste Management have gained 19.5% in a year’s time, outperforming the 17.7% rise of Zacks S&P 500 Composite and 13.8% rise of the industry it belongs to. Republic Services has returned 13.8% in the same time frame.

 

 

Earnings Expectations

Earnings growth along with stock price gains is often an indication of a company’s strong prospects.

Waste Management’s current-quarter earnings are projected to grow 23.3% compared with 22.4% for Republic Services.  Looking at the full-year 2018 picture, Waste Management’s earnings are projected to grow 26.7% while that of Republic Services are expected to increase 25.1%. For 2019, Waste Management’s earnings are expected to register 8.1% growth compared with 6.4% for Republic Services.

Thus, Waste Management has an edge over Republic Services in terms of quarterly and yearly projected earnings growth.

Earnings Surprise History

The earnings surprise history of a stock helps investors have an idea of the stock’s performance in the previous quarters.

Waste Management and Republic Services have an impressive earning surprise history, with their earnings surpassing the Zacks Consensus Estimate in three of the previous four quarters.

However, Republic Services has delivered a higher average positive earnings surprise than Waste Management. The reading for Republic Services is 5.2% compared with 3.9% for Waste Management.

Net Margin

Net profit margin helps investors evaluate a company’s business model in terms of pricing policy, cost structure and operating efficiency, and shows how good it is at converting revenues into profits. Hence, a strong net profit margin is preferred by all classes of investors.

Waste Management’s TTM net margin of 14.9% places it favorably in comparison to the industry’s figure of 13.9% and Zacks S&P 500 Composite’s figure of 12.1%. It also has a lead over Republic Services’ 13.5% TTM net margin.

Valuation                                                    

The EV/EBITDA metric is used to compare two stocks within the same industry and offers a clearer picture of a company’s valuation because it includes debt. The ratio is often used in addition to the P/E ratio.

We observe that while Waste Management and Republic Services have EV/EBITDA ratios of 13.4 and 13.8, respectively, the industry’s figure stands at 12.4 and the Zacks S&P 500 Composite’s stands at 11.7. Although both the companies compare unfavorably with the industry and the Zacks S&P 500 Composite, Waste Management has a lower EV/EBITDA value than Republic Services.

Though both the stocks look overvalued relative to the industry and the Zacks S&P 500 Composite, Waste Management is undervalued compared to Republic Services.

Bottom Line

Our comparative analysis shows that while Waste Management scores over Republic Services in terms of price performance, net margin and quarterly and yearly projected earnings growth. Republic Services has an edge in terms of earnings surprise history.

Although faster share price rally in the past year led to a rich valuation for both stocks compared with the industry and the benchmark index, Waste Management is cheaper compared to Republic Services.

Stocks to Consider

Some better-ranked stocks in the broader Business Services sector include Genpact Limited G, WEX Inc. WEX and Total System Services, Inc. TSS. All the stocks carry a Zacks Rank #2 (Buy).

The long-term expected EPS (three to five years) growth rate for Genpact, WEX and Total System Services is 10%, 15% and 14.6%, respectively.

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