Republic Services (RSG +0.93%) will release its quarterly report on Thursday, and optimism about the prospects for the recycling and trash business pushed shares to new all-time highs during the summer. Yet even as Waste Management (WM +0.42%) reported earnings earlier today that beat expectations, Republic Services is looking for ways to produce even more growth and catch up with its longtime rival in the business.
Republic Services and Waste Management have both done a good job over the years of producing growth through consolidation. Yet although acquiring smaller players could continue to provide growth opportunities for both companies, Republic has attracted more interest from Bill Gates' Cascade Investment, which has a $3 billion investment in Republic compared to having less than $500 million invested in Waste Management. Could Gates see greater growth potential from Republic than from its rival? Let's take an early look at what's been happening with Republic Services over the past quarter and what we're likely to see in its report.
Stats on Republic Services
|
Analyst EPS Estimate |
$0.49 |
|
Change From Year-Ago EPS |
4.3% |
|
Revenue Estimate |
$2.12 billion |
|
Change From Year-Ago Revenue |
3.6% |
|
Earnings Beats in Past 4 Quarters |
1 |
Source: Yahoo! Finance.
Can Republic Services earnings grow faster this quarter?
Analysts have made only the smallest of moves in recent months on their views about Republic Services, cutting their third-quarter earnings estimates by a penny per share but leaving longer-term projections unchanged. The stock has stayed near its highs but failed to produce further advances, falling 1% since late July.
Unfortunately, Republic Services had a bad start to the quarter, as adjusted net income plunged 28% from the previous year's second quarter. Revenue rose a modest 2.5%, but declines in recycling commodity revenue held back the company's sales growth. Still, Republic kept its guidance on earnings and free cash flow for 2013 unchanged, helping to minimize the damage on the stock.
The nice thing about the trash and recycling business, though, is that it has never-ending demand. Cyclical changes affect both supply and demand, as a sluggish economy leads to fewer people buying new things and therefore throwing away less. Boom times lead to greater disposal and often higher prices for recycled materials. In the long run, though, those cycles balance out and leave room for both Republic and Waste Management to grow as populations increase.
Yet the most interesting new development for Republic, Waste Management, and peer Waste Connections (WCN +0.06%) is an increasing emphasis on natural gas. As a gas user, Republic has about 10% of its fleet fueled by natural gas, and its plans are to make half of its new truck purchases compatible with the clean-burning fuel. At current price levels, Republic actually saves money using natural gas fuel. Republic has also taken steps toward harvesting landfill gas, with the company claiming 70 active projects nationwide. With potential uses that include collaborations with local businesses, electrical generation, and diverting gas to households for heating purposes, the industry is taking recycling to a whole new level.
In the Republic Services earnings report, look at how much the company is able to move forward with its energy efforts. With so much growth potentially available from the energy aspects of waste handling and recycling, Republic has a chance to compete better against Waste Management to become an even more important part of the industry.
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