Republic Services, Inc. Stock Analysis – Too Expensive For Me (Part 2 Of 3)

Summary

  • This Republic Services, Inc. stock analysis is the 2nd of a 3 part series on the largest non-hazardous solid waste collection companies.
  • The non-hazardous solid waste collection industry is highly fragmented due to its low entry barriers.
  • Growing to a meaningful size is not easy and requires readily accessible sources of capital.
  • The largest players within the industry have a sizable pool of acquisition opportunities.
  • RSG management has indicated that, in the short-term, dividend growth and share repurchases will receive more priority than tuck-in acquisitions.
  • RSG might be attractive to some investors but I view it as too expensive at current levels.

Introduction

This is the second of three articles wherein I review the three largest companies in the North American non-hazardous solid waste collection, transfer, disposal, recycling and energy services business.

This post covers the second largest publicly traded company in this space: Republic Services, Inc. (NYSE: RSG) with a market cap of ~$21.6B. An Industry Review is excluded from this post but can be found in my first post within this series.

Business Review

On December 5, 2008, RSG completed its merger Allied Waste Industries Inc.. Almost immediately, however, RSG faced an ailing economy and higher operating costs. Circumstances have obviously changed since then and this merger has turned out to be quite successful.

RSG Ratios from Morningstar
RSG Ratios from Morningstar

RSG now provides non-hazardous solid waste and recycling services for commercial, industrial, municipal and residential customers.

It has in excess of 33,000 employees which service in excess of 14 million customers in more than 2700 municipalities and communities.

Readers are encouraged to review RSG’s August 2017 Investor Presentation found on the company’s website. I, however, include the following few pages from this presentation for ease of reference.

RSG - 2016 Revenue by Market Type and Line of Business
RSG – 2016 Revenue by Market Type and Line of Business
RSG - Pricing and Volume Trends
RSG – Pricing and Volume Trends

Source: RSG August 2017 Investor presentation

RSG At a Glance
RSG At a Glance

Source: 2016 RSG Sustainability report

As part of RSG’s Blue Planet™ sustainability platform, it has a goal of adding an additional 150,000+ tons/year of recycling capacity by 2018. It currently operates 64 recycling centers which recover ~2.5 million tons of recycled commodities annually. RSG’s 2016 Sustainability Report can be accessed here.

RSG- National Footprint
RSG- National Footprint

Source: RSG August 2017 Investor presentation

On August 24, 2017 RSG entered into a definitive agreement to acquire ReCommunity Holdings II, Inc., the largest independent recycling-processing company in the United States. The acquisition involves “26 recycling centers in 14 states, primarily in locations where RSG maintains a leading market presence. Combined, these facilities recover approximately 1.6 million tons of recycled commodities annually.”

Details surrounding this acquisition have not yet been disclosed.

Readers interested in learning more about the multiple Risk Factors RSG faces are strongly encouraged to review RSG’s 2016 Annual Report for the fiscal year ending December 31, 2016. A comprehensive list of the risks commences on page 32 and ends on page 41!

Q2 + 1H FY2017 and Guidance for Remainder of FY2017

On July 27, 2017, RSG released its Q2 + 1H FY2017 and Guidance for Remainder of FY2017.

RSG - 2017 Adjusted EPS Guidance
RSG – 2017 Adjusted EPS Guidance

Source: RSG August 2017 Investor presentation

Credit Rating

RSG maintains investment grade credit ratings on its senior debt. As at December 31, 2016 it was rated BBB+ by Standard & Poor’s Ratings Services, BBB by Fitch Ratings, Inc. and Baa3 by Moody’s Investors Service, Inc..

  • Standard & Poor’s Rating Scale and Definitions can be found here.
  • Fitch’s Rating Scale and Definitions can be found here.
  • Moody’s Rating Scale and Definitions can be found here.

Long-Term Debt

This is a highly capital intensive industry. Leverage is used to fund fixed assets and mergers and acquisitions.

The following snapshot of RSG’s debt position was taken from page 122 of the pdf version of the 2016 Annual Report.  There are no significant maturities on term debt until 2018.

RSG - Debt snapshot
RSG – Debt snapshot

Source: RSG’s 2016 Annual Report/10-K

RSG - Debt Maturity Profile
RSG – Debt Maturity Profile

Source: RSG August 2017 Investor presentation

Dividends, Stock Splits, and/or Share Buybacks

RSG’s stock split and dividend history found on its website only goes as far back as 2012 so you may wish to view the history here.

In its August 2016 Investor Presentation management specifically indicated that share repurchases and dividends are going to get the lion’s share of the forecast cash utilization versus tuck-in acquisitions. Given this, I suspect the acquisition of ReCommunity Holdings is a tuck-in acquisition that will fall into the $0.1B set aside for acquisition purposes.

RSG - Cash Flow Utilization Priorities
RSG – Cash Flow Utilization Priorities

Source: RSG August 2017 Investor presentation

Management announced an 8% increase in the annual dividend on July 27th; $0.32/quarter is being increased to $0.345/quarter commencing with the October 16, 2017 payment. While the dividend payout ratio is in the mid 60% range, management clearly has sufficient confidence that this dividend increase will not pose a challenge.

The current dividend yield is slightly above 2.1% based on a stock price of ~$64.50. This may scare away dividend yield hungry investors but you may be willing to hold shares in low dividend yield companies if:

  • management has a dividend policy which will result in future dividend increases;
  • the dividend payout ratio has room for expansion;
  • FCF and Operating Margins provide ample room for safe dividend increases.

On the dividend repurchase front, RSG has a track record of repurchasing shares (please refer to first image in the Business Review section of this post).

Valuation

On July 27th, RSG raised its full-year adjusted diluted EPS guidance to $2.3 – $2.39 from the original guidance of $2.32 – $2.36.

RSG - 2017 Adjusted EPS Guidance
RSG – 2017 Adjusted EPS Guidance

Source: RSG August 2017 Investor presentation

Multiple brokers have projected 2017 Adjusted EPS of $2.39/share.

RSG TD WebBroker EPS Estimates
RSG TD WebBroker EPS Estimates

Source: TD WebBroker

If I use the consensus FY2017 adjusted EPS estimate of $2.39 and the current stock price of ~$64, I get a forward PE of ~26.8. This is somewhat higher than historical levels.

RSG Morningstar PE Ratios
RSG Morningstar PE Ratios

Source: Morningstar

Compound Annual Growth Rates

The following compares the Compound Annual Growth Rates for various metrics for all three companies covered in this series of posts; WCN is more of a growth story than RSG and WM.

CAGR for WCN RSG and WM
CAGR for WCN RSG and WM

Source: 2007 – 2016 Annual Reports for WCN, RSG, and WM

Further details on this subject matter can be found in the Compound Annual Growth Rates section of my Waste Connections (NYSE: WCN) stock analysis.

Republic Services, Inc. Stock Analysis – Final Thoughts

I find the highly fragmented non-hazardous solid waste collection, transfer, disposal, recycling and energy services industry to be extremely attractive. In my opinion, however, too many investors think the waste management business is wonderful. As a result, I view RSG’s shares as being a bit more expensive than what I would be prepared to pay.

I would like to own shares in this wonderful company but if I overpay for same I am likely to be less than pleased with my investment. I will, therefore, refrain from initiating a position and will patiently wait for some events to result in a retracement in RSG’s share price at which time I will re-evaluate whether I want to add it to my FFJ Portfolio.

Note: I sincerely appreciate the time you took to read this post. As always, please leave any feedback and questions you may have in the “Contact Me Here” section to the right.

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I currently have no position in RSG and am unlikely to initiate a long position within the next 72 hours.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.

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