Like fabled investor Peter Lynch, I enjoy investing in businesses that are unpleasant, ugly, and sometimes flat-out disgusting. And while the next season of Dirty Jobs could well prove me wrong, I think waste collection, hauling, and handling has to qualify as at least "unpleasant." The other thing to keep in mind, though, is that an ideal investment in even an unsavory sector has to come at the right price, so that's the question to explore with Allied Waste (NYSE:AW) today.
Results for this quarter strike me as mixed. The good news was certainly on the revenue side. Internal revenue growth clocked in at 7.7%, with 5.5% growth in pricing -- and about half of that coming from fuel surcharges. On the volume side, residential volumes were down, but I don't mind that so much when it's a consequence of steering away from less-than-adequately profitable business.
Below the revenue line, though, I'm a little less thrilled. Operating income and EBITDA were up just 3% and 4%, respectively. My problem here is that part of the bullish story on Allied Waste centers on improving productivity and boosting margins, and thereby earning better returns from the asset base. So while I'll accept management's explanation that it made "investments" in marketing and management development, it's not a very good explanation.
One positive item of note came after the call, when the company announced that it had priced $600 million of debt due in 2016 at a rate of 7.125%. This cash will then be used to repay bonds expiring in '08 that carried a coupon of 8.875%. And while the company has further room to restructure the balance sheet, I believe management is trying to balance out the possibility that improved results (and interest coverage) will lead to better ratings and cheaper refinancings with the risk of further rate increases.
In terms of operating performance, Allied Waste isn't a Waste Connections (NYSE:WCN), Waste Management (NYSE:WMI), or Republic Services (NYSE:RSG) -- all of which have a mix of better returns on assets, operating margins, or both. But the real question is whether management can continue to improve returns and thereby earn a better multiple.
I'd offer a guarded "maybe," but I'd encourage investors considering this one to keep a careful eye on progress with margins, refinancings, and returns on capital. After all, a positive cycle of contract repricing is good, but better returns on the capital base will have more lasting benefits.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
