Garbage-hauler Republic Services (RSG) posted nice third-quarter results that showed the best organic top-line expansion in years and double-digit operating-income and earnings-per-share increases. We are retaining our position in our Best Ideas portfolio and see no reason to change our fair value estimate at this time.
The firm’s core pricing advanced 0.7% in the period (slightly lower than management’s expectations), while fuel surcharges and commodities pricing added another 1.2% and 1.7%, respectively, to top-line growth. Republic’s municipal solid waste landfill prices increased 3%, which improved sequentially. Core volume also nudged up slightly in the period, excluding the San Mateo and Toronto contract losses–the ninth consecutive quarter of volume improvement. Importantly, the volume increase compares to a 2.5% decrease in the year-ago period and may suggest the bottom might be in, as it relates to volumes. All-in internal growth was 2.6% in the period versus -0.6% in last year’s quarter, so Republic’s quarter could represent a nice inflection point in fundamental performance. In fact, the firm’s internal growth in the period was the best since 2008.
The garbage hauler reaffirmed its 2011 financial guidance for adjusted diluted earnings per share, as well as its adjusted free cash flow outlook ($900 million at the high end), a forecast we believe is readily achievable–the firm has already pulled in over $700 million through the first three quarters. We maintain that Republic Services is a core position in our Best Ideas Portfolio on the basis of our DCF valuation process and think its recently increased dividend–it upped its dividend 10% earlier this year–has further room to expand thanks to the firm’s strong and predictable cash flow stream and comparatively low payout ratio.