It's been hard to be in the trash business lately. That's particularly true for industry giants like Waste Management (NYSE: WM) and Republic Services (NYSE: RSG), which have been hit by falling commodity prices for their recycling businesses, and falling energy prices in the waste-to-energy space. And now the pair has to deal with proposed legislation that could ban trash from crossing state lines to find a welcoming landfill. But that may not be as bad as it looks.
Trash crosses state lines?
Landfills used to be pretty prevalent until environmental laws started to make running a dump harder and more expensive. For example, there were around 8,000 landfills in the United States in 1988, but that number had fallen to around 1,900 by 2013. One of the big changes was that smaller dumps closed up, and larger ones remained or were opened. The survivors were getting fed more trash from more places, including refuse that crossed state lines.
Today, Waste Management owns roughly 250 landfills. Republic owns another 190 or so. Do that math, and you'll see that these two companies control nearly 25% of the country's landfills.
Waste Management gets around 18% of its revenues from its landfill segments and Republic gets around 12% of its top line from the space (another 5% comes from transfer services, which feeds trash in to the landfill business). So when new legislation is put out that seeks to limit how trash gets moved from where it's collected to where it's deposited, these two industry giants are going to be affected.
The proposed rule is pretty simple, too: Trash that's made in one state has to go to a landfill in the same state. Bob Casey, the Democratic Senator from Pennsylvania, explained his reasoning this way: "Pennsylvania shouldn't be a dumping ground for trash from other states." Hard to argue with that, unless you're having your trash toted off to PA.
A reliable business
Landfills are very hard to build, facing regulatory constraints and the not-in-my-backyard pushback that you'd expect to see from locals. So these assets are actually quite valuable and offer a reliable revenue stream. For example, Waste Management's landfill revenues have climbed steadily each year since the turn of the decade, rising from $2.5 billion to $2.8 billion. Republic's landfill revenues haven't been as consistent, but have increased from roughly $1.865 billion in 2010 to a touch over $2 billion last year. .
Is that a huge revenue jump for either company? No. But running dumps has been much more stable than recycling, where revenues at both companies are still down 10% from their 2011 peak. And according to Waste Management, running landfills has historically been one of its most profitable businesses.
While the legislation could crimp the flow of rubbish into Waste Management's and Republic's landfills in the near term as regions adapt to the change, it will likely make their collection of dumps that much more valuable over the long term. In fact, it will likely make smaller trash haulers even more dependent on these giants for the long-term disposal of what they collect because it will limit landfill options across the entire industry. Waste Management doesn't break down its landfill ownership by state, but it has landfills in every region of the country, with room for expansion, and has physical operations in every state. Republic, a smaller company, operates in around 40 states.
In other words, if there's trash that needs to be disposed of within a state, one or both of this pair can probably find a place to put it. If the new legislation becomes a law, look for a period of disruption as the industry adjusts to a new reality. But then look for landfills overall to become even more in demand, as a place has to be found for rubbish that had formerly gone from one state to another.
Offsetting that will be landfills that see reduced intake as out-of-state trash stops showing up; but with large collection footprints and a history of bolt on acquisitions, both Waste Management and Republic should be able to resolve that issue over time by expanding their collections operations. Or they could simply readjust their landfill portfolios, selling those in states where they have too much capacity, and growing share in states where they need more. Their already notable footprints should make that fairly easy to accomplish.
After the adjustment
But in the end, if the proposed law moves forward, landfills will likely turn into a location, location, location property market. And Waste Management and Republic, with huge footprints and solid finances, will be able to benefit from what they already own and their ability to shift their portfolios of landfill properties around to maximize profitability. In other words, at least for this pair, a rule limiting trash from crossing state lines will likely make their landfill assets even more valuable than they already are.