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Republic Services (RSG) Sees Internal Growth, Debt High

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Republic Services, Inc. (RSG - Free Report) is benefitting from internal growth, increased operational efficiency as well as consistent record of rewarding shareholders in the form of dividend and share repurchases.

The company delivered mixed results in the second quarter of 2018, wherein earnings came in line with the Zacks Consensus Estimate and revenues missed the same. Adjusted earnings per share (EPS) of 73 cents came in line with the consensus estimate and increased 19.7% year over year. Total revenues of $2.52 billion missed the consensus mark by $8 million and marginally declined year over year on a non-adjusted basis but increased 3.9% on proforma basis.

Republic Services’ surprise history looks impressive. It beat earnings estimates in three of the trailing four quarters, the average being 5.2%. For the third quarter, the consensus estimate increased 1.2% in the past 30 days.

In a year’s time, shares of the company have gained 12.6% compared with the industry’s rise of 12.4%.

Internal Growth

Republic Services continues to grow internally on long-term contracts for the collection, recycling and disposal of solid waste materials. Moreover, the company continues to look out for strategic price increase to offset increased costs, improve operating margins and enjoy an appropriate return on its substantial investments in vehicles, equipment, landfill, transfer stations as well as recycling centers.

The company’s business is benefitting from increasing demand for recycling of waste products. During the second quarter of 2018, revenue growth included a positive impact of 2.1%, which was basically driven by 2.1% increase in average yield, volume growth of 60 basis points (bps), increase in fuel recovery fees by 60 bps and increase in energy services revenues by 20 bps.

Improved Operational Efficiency

The company is focused on improving operational efficiency by shifting to compressed natural gas (CNG) collection vehicles and transforming rear-loading trucks to automated side loaders, which will streamline cost structure, improve revenue quality and enhance growth through profitable investment opportunities.

The company is highly optimistic about the usage of CNG vehicles, which will help to compete effectively in maintaining a clean environment. Despite higher expenses, CNG reduces the company’s overall fleet operating costs through lower fuel expenses.

 

Consistency in Rewarding Shareholders

Republic Services’ consistent record of returning value to shareholders through dividend and share repurchases also raises optimism in the stock. In the second quarter of 2018, the company returned $328 million to shareholders in the form of dividends and share repurchases.

In 2017, Republic Services returned $440.5 million and $610.7 million to shareholders in the form of dividends and share repurchases, respectively. Additionally, in 2016, the company returned $418.9 million to shareholders through dividend payments and repurchased $403.8 million of shares. Such consistency indicates the company’s commitment to create value for shareholders and accentuate confidence in the business.

Risks

Republic Services’ balance sheet is highly leveraged. As of Jun 30, 2018, long-term debt (net of current maturities) was $8.2 billion while cash and cash equivalents were $61.3 million. Such a cash position implies that Republic Services needs to generate an adequate amount of operating cash flow to pay debts. Moreover, high debt may limit expansion and worsen its risk profile.

The company’s business continues to suffer from weak landfill pricing due to high cost of landfills and leachate. This limits its ability to increase prices, which is necessary to cope up with higher costs, improve operating margins and make necessary investments. These factors are likely to weigh on the company’s margins and revenues in the upcoming years.

Zacks Rank & Key Picks

Currently, Republic Services carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader Business Services Sector include Genpact Limited (G - Free Report) , WEX Inc. (WEX - Free Report) and Total System Services, Inc. (TSS - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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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