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WM or RSG: Which Waste Management Stock Is Better Placed?

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The waste management market has been in good shape since the beginning of the year driven by rise in oil production, increase in municipal solid waste, strong construction activity, economic growth and increase in the ageing population.

The industry is expected to remain on a solid footing as awareness regarding renewable waste management systems is increasing and so are concerns regarding rise in CO2 emissions. Most of the companies have increased their focus on recycling municipal solid waste (MSW) and nonhazardous industrial waste management for reduction of pollution. Government initiatives to introduce sustainable waste management mechanisms and put a check on illegal dumping are driving demand for waste management services.

Per a new report by Allied Market Research, the global waste management market size is anticipated to reach $530 billion by 2025 from $330.6 billion in 2017, at a CAGR of 6% from 2018 to 2025.

Notably, The Zacks Waste Removal Services Industry has a Zacks Industry Rank in the top 40% (100 out of the 250 plus groups).

Considering this backdrop, it is not a bad idea to undertake a comparative analysis of two waste removal services stocks – Waste Management (WM - Free Report) 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 $47.9 billion, Republic Services’ market cap is $28.1 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 stocks here.

Price Performance

Waste Management clearly scores over Republic Services in terms of price performance. Shares of Waste Management have gained 22.2% in a year’s time, outperforming the 17.8% rise of Republic Services and 16.7% growth of the industry.

Earnings Expectations

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

Republic Services’ earnings for 2019 are projected to grow 6.2% while that of Waste Management are expected to increase 3.6%. For 2020, Republic Services’ earnings are expected to grow 5.9% while that of Waste Management are projected to increase 7%. Thus, Republic Services has an edge over Waste Management in terms of current-year projected earnings growth. Waste Management wins the round in terms of earnings growth projections for the next year.

Estimate Revisions

The direction of estimate revisions serves as an important pointer when it comes to the price of a stock.

The Zacks Consensus Estimate for Republic Services’ 2019 earnings inched up 1.2% in the past 60 days. For Waste Management, estimates for 2019 moved up 0.5% in the same time frame.

Earnings Surprise History

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

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

However, Waste Management has delivered a higher average positive earnings surprise than Republic Services. The reading for Waste Management is 3.8% compared with 3.1% for Republic Services.

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 12% places it favorably in comparison to the industry’s figure of 11.4% and Republic Services’ figure of 10.2%.

Valuation

EV/EBITDA is a commonly used multiple for the waste management industry. We observe that while Republic Services and Waste Management have EV/EBITDA ratios of 12.45 and 12.78, respectively, the industry’s figure stands at 10.88. Although both the companies compare unfavorably with the industry, Republic Services has a slightly lower EV/EBITDA value than Waste Management.

Bottom Line

Our comparative analysis shows that while Waste Management scores over Republic Services in terms of year-over-year price performance, projected earnings growth for the next year, surprise history and net margin, Republic Services has an edge in terms of projected earnings growth for the current year and earnings estimate revisions. A faster share price rally in the past year led to a rich valuation for Waste Management stock.

Stocks to Consider

Some better-ranked stocks in the broader Zacks Business Services sector are Global Payments (GPN - Free Report) and Cardtronics (CATM - Free Report) , each sporting a Zacks Rank #1 (Strong Buy).

Long-term expected EPS (three to five years) growth rate for Global Payments and Cardtronics is 17% and 4%, respectively.

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