The biggest solid waste disposal and landfill companies in North America -- Waste Management, Republic Services, and Waste Connections -- posted solid results in Q3 2019. All three saw revenue gains, as well as increases in earnings per share (EPS) and operating cash flow over the prior-year quarter.
In spite of that, the market's reaction was mixed. Waste Management's stock tumbled 3% after it was the first of the three to report earnings on Oct. 23. Shares of Waste Connections, however, jumped 1.1% after it reported on Oct. 28. And Republic Services' shares fell 1.4% after its report on Oct. 30. Here's what happened and what it can tell investors about the future of the sector.
The raw numbers
|Company||Q3 2019 Revenue||Q3 2018 Revenue||Q3 2019 Adjusted EPS||Q3 2018 Adjusted EPS||Q3 2019 Operating Cash Flow||Q3 2018 Operating Cash Flow|
|Waste Management ( WM 0.47% )||$3.97 billion||$3.82 billion||$1.19||$1.15||$952 million||$873 million|
|Republic Services ( RSG 0.24% )||$2.65 billion||$2.57 billion||$0.91||$0.82||$651 million||$582 million|
|Waste Connections ( WCN 0.17% )||$1.41 billion||$1.28 billion||$0.60||$0.57||$432 million||$373 million|
The more important metric
You'd think that these kinds of numbers -- up across the board -- would draw praise on Wall Street, but that's not what happened in the case of Waste Management. As usual, this was a reaction to the company not living up to analysts' high expectations.
Waste Management's investors seem to have focused on a year-over-year revenue increase that slightly missed the consensus forecast (by an insignificant 0.78%), rather than the 2.6% earnings beat. You'd think that the earnings number would be seen as more important -- after all, a company that is able to squeeze more earnings out of less revenue is better off than the alternative. CEO Jim Fish certainly wasn't ruffled by the results, reaffirming the company's previously issued 2019 guidance.
The news was pretty much the same over at Republic Services. A very slight revenue miss of 1.9% was coupled with a 6.6% earnings beat. However, in Republic's case, the company upped its EPS guidance for the year by $0.02, which is probably why its share price didn't fall as far as Waste Management's.
At this point, you can probably guess why Waste Connections' stock jumped while the others fell. That's right: It topped analysts' consensus estimate for revenue (albeit by just 0.5%), while also beating the earnings estimate by 1.4%. The company didn't adjust its 2019 guidance, which it had already raised for the year after a strong Q2.
It hardly seems like these slight revenue misses or beats should matter so much to investors, but these three companies (and, indeed, the waste management industry as a whole) don't tend to generate a whole lot of significant news between earnings reports, so small earnings items can sometimes have outsize effects on share price.
Assessing the value
All three companies are growing. That's not surprising considering the growth in population, which generally equates to an increase in trash volumes, and the strong U.S. economy and low unemployment, which provides more tax revenue for municipal coffers and allows waste management companies to negotiate more favorable contracts.
As essential services, trash hauling and landfilling tends to be seen as a recession-resistant industry: Regardless of how the economy's doing, you can't just let trash pile up in the street! That, along with continually strong performance, may have contributed to these stocks' rise over the first eight months of the year:
All three outperformed the S&P 500 through Sept. 1, which caused their valuations to rise. Waste Management, in particular, saw its price-to-earnings ratio skyrocket 45.9% to 29.1, on the higher end of its historical range, and calling into question whether it was overvalued.
Since September, however, the companies' share prices have declined, with Waste Management's P/E ratio slipping to 26.8 and Republic's to 25.7. Still not screaming bargains, but enough to suggest that the companies are still worth considering. Waste Connections has always had a much higher P/E than the other two, and its current P/E of 41.9 is actually toward the lower end of its historic range.
Solid picks from solid waste
These companies continue to execute well and take advantage of the tailwinds of their industry. While they don't look particularly cheap at the moment, investors can expect them to continue their recent record of slow-and-steady growth. There are worse places to put your money, especially if you're concerned about a potential recession.