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Should Republic Services Be in Your Portfolio or Your Trash Bin?

By Tyler Crowe - Dec 17, 2012 at 9:36PM

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Let's take a look at what may be in store for Republic Services.

The end of the year is a great time for investors to look back on their investments. While it may not be a solid indication of what to expect in the coming year, it does lend perspective. Today, let's take a look at Republic Services (RSG -1.15%) and see what the coming year might have in store.

How it's done in comparison to its peers:

RSG Chart

RSG data by YCharts

Company

Profit Margin

Return on Assets

Debt-to- Equity

P/E

Dividend Yield

Republic Services

7.84%

4.58%

91.77

15.27

3.3%

Casella Waste Systems (CWST -3.51%)

(22.16%)

1.82%

1391.23

N/A

N/A

Veolia Environment (VEOEY -0.62%)

(0.9%)

1.64%

204.1

15.24

6.6%

Waste Management (WM -0.43%)

6.31%

5.7%

151.75

14.73

4.2%

Source: Company 10-Ks

Anything you can do I can do better
The waste management industry has been dominated for years by one big player, aptly named Waste Management. After years of consolidation in the waste industry, though, Republic Services has built itself up to a $10 billion market cap. It is now large enough for Waste Management to start paying attention to it.

From an investor's viewpoint, it appears these two companies have been fighting an operational efficiency war. Both of these garbage giants have been converting their collection vehicle fleets to natural gas in order to take advantage of their natural gas-rich landfills (Waste Management has 1,700  natural gas vehicles and Republic Services has 1,000 ). Both companies have also signed agreements with natural gas fueling station company Clean Energy Fuels (CLNE -9.58%) to  supply these new fueling stations with methane from landfills as fuel.

Now, both companies are looking to up the ante by going into solar energy. They have worked for several years on solar-powered trash compactors for public spaces. These compactors are designed to reduce the frequency of trash collection by 80%. Upping the ante even further, Republic Services recently completed a one-megawatt solar field on one of its existing landfills near Atlanta, producing enough energy to power over 200 homes in the region. With landfills taking up so much unusable real estate , don't be surprised if Waste Management follows suit with these kinds of projects.

What a Fool believes
With overall waste levels declining in the US and constricting municipal budgets tightening, collection revenue for the company has remained essentially flat for the entire year. So unless it gobbles up some of its smaller competitors or goes into a bidding war with Waste Management over collection contracts, it will need to find ways to generate revenue from places other than collection. This could prove very difficult, especially considering that Republic Services generates over 77% of its revenue from collection services .

Revenue from other ventures such as landfill gas will be a much more volatile revenue source than what it is used to because selling energy and electricity will be exposed to commodity prices of all energy sources. With current oil and gas prices so low, the company will have difficulty generating profits from this part of the business.

Overall, investors should applaud management for recognizing that growth will more than likely come from outside its core business of trash collection. With a payout ratio of 52% on its 3.2% dividend, there is probably little risk to income investors for quite some time. At the same time, though, keep a sharper eye on commodity prices because they will have a larger say in the company's revenue.

Much like Republic Services, Waste Management is facing similar macroeconomic conditions that require these waste titans to creatively find new ways to grow. Take a look at our premium report to see how Waste Management plans to tackle these problems.

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Stocks Mentioned

Waste Management, Inc. Stock Quote
Waste Management, Inc.
WM
$148.88 (-0.43%) $0.65
Clean Energy Fuels Corp. Stock Quote
Clean Energy Fuels Corp.
CLNE
$4.91 (-9.58%) $0.52
Veolia Environnement S.A. Stock Quote
Veolia Environnement S.A.
VEOEY
$25.65 (-0.62%) $0.16
Republic Services, Inc. Stock Quote
Republic Services, Inc.
RSG
$127.91 (-1.15%) $-1.49
Casella Waste Systems, Inc. Stock Quote
Casella Waste Systems, Inc.
CWST
$70.01 (-3.51%) $-2.55

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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