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At first glance, Republic Services (RSG +0.70%) appears to have reported a trashy quarter after net income and earnings per share plunged more than 50%. However, those results are solely due to the costs associated with a tender offer to refinance some of its debt. After digging out those costs, the quarter was just as investors have come to expect: slow and steady growth.
Republic Services results: The raw numbers
|
Metric |
Q3 2016 Actuals |
Q3 2015 Actuals |
Growth (YOY) |
|---|---|---|---|
|
Revenue |
$2.4 billion |
$2.3 billion |
2.8% |
|
Net income |
$85.7 million |
$215.2 million |
(59.2%) |
|
Earnings per share |
$0.25 |
$0.61 |
(59%) |
Data source: Republic Services, Inc. YOY = year over year.
What happened with Republic Services this quarter?
Republic Services continues to show consistency:
- Revenue maintained its steady rise due to a combination of volume and price increases. For the quarter, the average yield increased 2.1%, volumes edged up 0.6%, and core price rose 3.2%.
- While GAAP earnings plunged, that was due to costs associated with a tender offer for certain of its outstanding bonds, which the company refinanced with new bonds. The net result of that refinancing is a $17 million annual interest expense savings.
- After adjusting for those costs, earnings were $212.6 million, or $0.62 per share, which was up 15.1% from the year-ago quarter when adjusted net income was $184.7 million, or $0.53 per share. This result exceeded the company's expectations.
- Driving the expectation-beating earnings was an increase of 80 basis points in adjusted EBITDA margin, to 28.9%.
- The company continues to generate strong cash flow and has produced $576 million in adjusted free cash flow this year. It returned $212 million of that money to shareholders during the third quarter through share repurchases and dividends, boosting its full-year total to $622 million.
What management had to say
About the quarter, CEO Donald Slager said:
Our third-quarter performance underscores our ability to profitably grow our business, expand margins, increase earnings and free cash flow and efficiently return cash to our shareholders. Continued strength in our business and a favorable tax rate drove results that exceeded our expectations during the quarter. Given our solid results, we are updating our guidance to reflect our expected outperformance for the year.
Republic Services now expects adjusted earnings to be in the range of $2.19 to $2.20 for the full year, up from its prior range of $2.13 to $2.17. At the midpoint, that is 6.6% above last year's total of $2.06 per share. Meanwhile, the company is also increasing its guidance for adjusted free cash flow to a range of $840 million to $850 million, up from its prior range of $820 million to $840 million. At the midpoint, that represents a 4.4% increase from the $813 million in adjusted free cash flow it produced last year.
While that is stable growth, it pales in comparison to the growth of rival Waste Management (WM +0.74%), which likewise reported an expectation-beating quarter, leading it to increase guidance for the full year. According to Waste Management CEO David Steiner:
In 2016, we have seen three consecutive quarters of strong price, positive volume, and better than expected earnings performance. As a result, we are again raising our adjusted diluted earnings per share guidance for 2016. Our previous guidance for adjusted earnings per diluted share was between $2.83 and $2.86 for the full year. For the fourth quarter of 2016, we are confident that we can meet or exceed the current Wall Street consensus. Doing so will lead to full year adjusted earnings per diluted share of at least $2.91, which is a more than 5% increase from the mid-point of our initial 2016 guidance, and a more than 11% increase from 2015.
What's noteworthy about Waste Management's stronger growth rate is the fact that it is a much larger company than Republic Services.
Looking forward
Republic Services might not be growing as fast as its larger rival this year, but it does see its steady growth continuing next year. The company's preliminary outlook for 2017 is that earnings will grow to a range of $2.31 to $2.36 per share. At the midpoint, that is 6.4% growth over this year. Meanwhile, it sees adjusted free cash flow ranging between $875 million to $900 million, which at the midpoint would be 5% higher than 2016.
