Republic Services Trashed (News) August 30, 1999

Republic Services Trashed

By Dave Marino-Nachison (TMF Braden)
August 30, 1999

Investors turned up their noses at waste collection and disposal services provider Republic Services (NYSE: RSG) today, sending the company's shares down more than 30% on heavy volume following news that full-year earnings are expected to disappoint.

Republic expects 1999 earnings growth of between 16% and 18%, pegging full-year EPS at between $1.17 and $1.19 before charges. First Call's consensus estimate for the year was $1.25 per share, about 24% above year-ago figures.

"Our core business continues to perform at levels consistent with our expectations," said CEO James O'Connor. But, he continued, "It is taking the company longer than anticipated to bring certain acquisitions -- particularly assets acquired from Waste Management (NYSE: WMI) -- up to our quality and performance standards."

In September, Republic agreed to pay $500 million for Waste Management landfills and collection routes across the U.S. The sales were necessitated by the company's acquisition by USA Waste Services, which held on to Waste Management's name for the combined company.

"While these acquisitions have been accretive to earnings, some are not performing at levels consistent with our existing business.... In certain instances, the time needed to gain complete integration means the impact on our earnings growth will not be realized as quickly as we had initially expected," Connor said.

Republic also agreed in late July to buy $230 million in waste services assets -- including four landfill operations, eleven transfer stations, and a subset of small container hauling assets -- from Allied Waste Industries (NYSE: AW) to facilitate Allied's acquisition of Browning-Ferris (NYSE: BFI). Consolidation has been a buzzword in the halls of the waste management industry with companies looking to combine pickup routes and stuff landfills for increased profitability.

It hasn't been a great year for waste haulers. Waste Management, as chronicled in a mid-August missive from the Fool's own Brian Graney, is in the midst of an executive shakeup, it's market value decimated since July when it said revenue and earnings would fall short of expectations for Q2 and the rest of the year. Browning-Ferris, with a $45 per share price tag on its head courtesy of Allied, is the only major player that's held up.

As such, investors probably should be cautious in their assessment of last week's reports linking Republic to Waste Management's plans for further shedding of assets. The company reportedly plans to sell about 10% of its North American assets and most or all of its international operations to focus on its domestic divisions.

With recent acquisitions not performing as expected, investors may be a bit iffy about the prospect of Republic's biting off a bigger chunk of Waste Management despite the lure of more "bargains" like those it grabbed last fall. But if, as some analysts suspect, the industry is simply suffering from a case of acquisitive overeating, so to speak, the synergies intended at the time of the purchases should eventually show themselves.

If that's the case, there will probably be plenty of opportunities for investors to find bargains among the junk; certainly, this is beaten down considerably. In Republic's case, though, it probably wouldn't hurt to hold off until the company shows that it's making better progress in turning purchases into profits.

If it does -- particularly if it gets a crack at further Waste Management assets -- a return to favor for Republic stock could be around the corner.

Related Links:
Republic Services Message Board
NewsWorld, 8/16/99, "End of Waste Mis-Management?"
Fool Plate Special, 7/7/99, "Waste Management Dumped"

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