We reiterate our Neutral recommendation on Republic Services Inc. (RSG - Free Report) following the company’s mixed results in second-quarter 2012. The company’s adjusted earnings were 59 cents per share in the quarter, beating the Zacks Consensus Estimate of 49 cents. The results were also ahead of the year-ago quarter’s adjusted earnings of 49 cents. Total revenues decreased 1.2% year over year to $2.06 billion, lagging the Zacks Consensus Estimate of $2.11 billion.
Volume declined 130 basis points year over year in the second quarter. Volume growth is expected to remain sluggish in the upcoming quarters due to weak economic conditions prevailing in the U.S. Therefore, soft volumes will be headwinds for Republic Services moving ahead.
Margins are expected to remain constrained in the second half 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 margins.
Moreover, the company plans to invest extensively in certain areas in 2012 like improving capacity in the recycling centers, automation of the residential fleet and conversion of the fleet into CNG from diesel. These initiatives being capital intensive are expected to pressure margins further.
However, Republic Services repurchased 6 million shares during the second quarter for $163.2 million at an average cost of $27.06 per share. The company further intends to repurchase shares up to $750 million through December 31, 2013.
This is an addition to the $400 million repurchase program that the company announced in November 2010. In addition, the company increased quarterly dividend by 7% to 23.5 cents per share in July 2012 adding value to the shareholders.
Republic Services has a healthy balance sheet to finance acquisitions. The company completed acquisitions worth $73 million during the second quarter, representing annual revenue run rate of $47 million. These acquisitions are considered to be highly accretive and would prove beneficial for the company over the long run. The company aims to complete $100 million of acquisitions in the remainder of 2012.
Republic Services faces competition from Waste Management, Inc. (WM - Free Report) . The stock retains a short-term Zacks #4 Rank (Sell).