The old saying that the only certainties in life are death and taxes overlooked one other thing: garbage. Seriously, look around your life and you'll see rubbish everywhere. And that's not going to change anytime soon, which is why you might want to watch stocks in waste management. In fact, experts such as Waste Management, (NYSE:WM), Republic Services (NYSE:RSG), and Covanta Holding Corp, (NYSE:CVA) are ready to benefit from your ongoing ability to produce copious amounts of garbage.
It's in the name
Waste Management is one of the largest players in the trash-hauling space. Entrepreneur Wayne Huizenga started the company in the late 1960s and quickly used acquisitions to grow it into an industry giant. The basic model is the pairing of a route business in which the company goes around collecting trash and a landfill business where the trash ultimately ends up.
Routes are important and increasingly include recycling in the mix. But it's the landfills that really differentiate a company in the trash business. Why? Because people don't want new landfills in their backyards, which makes it hard, if not impossible, to build new ones. And that doesn't even take into consideration all the regulations around running landfills.
Waste Management owns around 250 landfills, giving the trash hauler material scale and a competitive edge over smaller players. Better yet, it allows the company to charge competitors for disposing of their collections in its landfills, too. This model isn't unique to Waste Management, but the company owns more landfills than any competitor in the United States.
That said, competition has been fierce in the industry, and even with the landfill edge, pricing has been an issue of late. That has a lot to do with recycling, a service that more and more customers want included with their trash pick up. The problem is that there's less demand for recycled cans and paper lately. That's pushed down prices and pinching the profitability of the haulers who signed contracts expecting to sell the products they recycle at higher prices then they have been able to.
So the top and bottom lines have been volatile in recent years. However, Waste Management has continued to increase its dividend annually, rewarding shareholders for their patience as the company works through a difficult market.
Being No. 1 in an industry is nice, but when it's fragmented, as waste management is, being No. 2 can be pretty desirable as well. Republic Services is that runner-up, formed by the 2008 merger of Republic Services with Allied Waste. Like Waste Management, Republic's growth, since the big merger, has come from buying smaller competitors over time. And a key competitive strength is owning roughly 190 landfills.
The biggest difference between Waste Management and Republic, however, is really size. Waste Management is roughly 50% larger than Republic based on revenue. So smaller acquisitions can mean more to the top and bottom line at Republic, and at the same time, it has enough scale to be a major industry factor. If you're looking at Waste Management, you should also be looking at Republic, if only for comparison's sake.
Energy or trash?
While a lot of trash goes into landfills, that's not the only thing you can do with rubbish. That's where Covanta comes in. This company is usually lumped in with utilities, since it runs power plants. However, one of the primary fuels for its power plants is the burning of garbage. In fact, the company's garbage and recycling services have made up around two-thirds of revenues in recent years, suggesting that it's more a trash hauler than energy company.
That said, this balance can change rapidly with the price of electricity. But it shows just how important trash is to Covanta's results. In fact, trash is probably the more reliable part of its business mix, which makes this energy-from-waste company an outside-the-box play on the waste-management space.
We'll make more
Yes, death and taxes are certainties in life, but so is the fact that you'll make more garbage. And someone has to clean it up. That gives the companies that deal with your trash, like Waste Management, Republic Services, and Covanta, a steady flow of business. And it's also a good reason for watching stocks in the waste-management industry.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Republic Services. The Motley Fool owns shares of Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.