Valuentum Exclusive Analysis for the Discerning Investor

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Image: Republic Services

By Brian Nelson, CFA

We like the garbage hauler space given the relative stability of its operations and the pricing power that emanates from landfill and disposal capacity. Garbage must eventually go somewhere, and those that own the disposal capacity are the ones that can control the value chain. The municipal solid waste industry in the United States is an oligopoly, dominated by the Big 3, Waste Management (WM), Republic Services (RSG), and Waste Connections (WCN). We include Republic Services in the Dividend Growth Newsletter portfolio.

On November 5, Republic Services reported third-quarter results that showed the resilience of the firm’s business model. The trash taker’s adjusted EBITDA margin expanded 230 basis points, while it delivered double-digit growth in adjusted earnings (+11%) and adjusted free cash flow (+13.8%). Management also increased its adjusted free cash flow guidance for 2020 on the third-quarter announcement thanks in part to strength in EBITDA and improvements in working capital. Pricing remains the name of the game in the waste space, with third quarter core price increases driving revenue 4.5% higher.

Looking ahead to the all of 2020, Republic Services reinstated its full-year 2020 adjusted EPS guidance, to the range of $3.37-$3.40, and the company now anticipates that adjusted free cash flow generation on the year will come in the range of $1.15-$1.2 billion. Part of our thesis on Republic Services centers on its strong and growing free cash flow generation to keep paying out a growing dividend. We don’t expect its recently announced share buyback authorization to the tune of $2 billion to compromise that dividend focus.

We love companies with strong future expected free cash flow generation, especially ones that have strong net cash positions. Republic Services doesn’t have the strongest balance sheet, with a rather large net debt position emanating from rolling up a number of independent garbage haulers in the past, including Allied Waste, but it’s not something we’re worried about, given its strong and predictable free cash flow, contractual revenue visibility in its collection operations, and pricing power at its disposal facilities. We’re reiterating the high end of our fair value estimate range of $96 per share.

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Brian Nelson owns shares in SPY, SCHG, DIA, VOT, and QQQ. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.