Republic Services (RSG) is a national provider and industry leader in recycling and non-hazardous solid waste disposal. With 355 collection operations, 238 transfer stations, 198 active landfills, 71 recycling processing centers, and six treatment, recovery, disposal, and storage facilities, among other major assets, the company serves a substantial chunk of the total market.
Specifically, the company operates in 41 states and roughly holds 1/3 of the total industry market share. Its only noteworthy competitor is the publicly traded Waste Management (WM), which dominates the market with over half of the market share. That said, each company has its own long-term contracts with municipalities and other clients, thus not directly clashing constantly.
I am neutral on Republic Services.
Expanding Business, Predictable Cash Flows
Historically, both Republic Services and Waste Management have been acquiring their smaller competitors, increasing their market share in a rather fragmented market. Republic’s latest big acquisition was that of the previously publicly traded US Ecology for $2.2 billion.
Following the acquisition, the company expects to expand Republic’s environmental solutions footprint across the United States and Canada while vertically integrating capabilities for its environmental solutions business.
With operating efficiencies to be achieved following a full integration, Republic should achieve noteworthy synergies and scaling economics. This should make for a great profitability growth catalyst moving forward amid a potential margin expansion.
This has been the case over the past several years as the company has been scaling, with net income margins expanding from as low as 6.5% in Fiscal 2016 to 11.4% last year.
Additionally, the trash-collection industry enjoys predictable cash flows due to its non-cyclical nature. Therefore, the company’s financials should remain resilient during a recession or turbulent times, as was the case during the pandemic.
Recent Performance
Republic Services’ Q1 results once again demonstrated the company’s ability to perform excellently, despite the underlying macroeconomic concerns. For the quarter, adjusted EPS came in at $1.14, an increase of 23% year-over-year, supported by revenue growth of 14.3% to $2.97 billion. Increased revenues were the result of higher pricing and acquisitions, while adjusted EPS was additionally strengthened by expanding margins and a lower share count.
Specifically, the EBITDA margin expanded 40 basis points quarter-over-quarter, even though it declined 30 basis points compared to last year. The net income margin expanded 42 basis points year-over-year to 11.86%, nonetheless.
Management plans to incorporate the contribution from US Ecology into the full-year outlook in July. Until then, we are considering the company’s prior guidance, which predicts FY2022 adjusted EPS to land between $4.58 and $4.65. Further, adjusted free cash flow, again, excluding US Ecology, is expected to be within the range of $1.625 billion to $1.675 billion.
Dividends & Valuation
Due to the company’s cash flows facing minimal volatility, Republic Services has managed to return capital to its shareholders consistently. The company boasts 18 years of consecutive annual dividend increases, with the five-year dividend per share CAGR standing at 7.45%.
The latest dividend hike was by 8.2% to a quarterly rate of $0.46, even suggesting a slight acceleration. In any case, these are very satisfactory dividend growth rates for such a mature company.
Based on its past frequency trend, Republic should announce another increase to its quarterly dividend this July. At the midpoint of management’s adjusted EPS guidance ($4.62), the payout ratio currently stands at 40%. Thus, there is plenty of room for the company to continue pursuing attractive dividend growth rates.
Adding to its total capital returns is the company’s stock repurchase program, which has around $1.5 billion left under authorization and is to be completed by 2023. The company bought back $252.2 million and $203.5 million worth of its stock during 2021 and Q1 2022, respectively. This was reflected in the latest quarter’s adjusted EPS growth amid a lower share count.
Regarding its valuation, assuming adjusted EPS of $4.62 for Fiscal 2022, Republic is currently trading at a forward P/E of 28.8. On the one hand, shares of Republic do deserve a premium as the company features a wide moat, resilient cash flows and pricing power, and consistently higher capital returns.
On the other hand, I find the stock modestly overvalued here, especially during a rising-rates environment. Even with double-digit adjusted EPS growth, I would assign a fair multiple to the stock closer to 25x earnings.
Wall Street’s Take
Turning to Wall Street, Republic Services has a Moderate Buy consensus rating based on six Buys and three Hold ratings assigned in the past three months.
At $146.33, the average Republic Services stock projection implies 9.8% upside potential.
Takeaway
Republic Services is a quality company operating in a very mature and non-cyclical industry. The company’s performance has been consistently strong, as was the case in its most recent results, while the acquisition of US Ecology should further boost internal efficiencies and margins.
Further, capital returns have been historically strong, with another dividend increase likely on the way. That said, shares appear fully valued at the moment, with little upside from a multiple expansion standpoint. Accordingly, I am neutral on the stock.
