Debt is high, but stable, and backed by stable cash flow and net income. Revenues continue to grow, and operating margin recovered in the last two years, regaining six out of 11 points lost. A soon-expected deal with Harrisburg city officials will improve debt and revert current cash shortcomings. Finally, Chinese authorities’ preference for local businesses offer limited expansion.
Trading at 26.2 times its earnings, just over the industry average, the stock is fairly valued. Current yield is at 3.14% at a dividend of $0.16, and the price is close to its 52-week high of $21.30. This stock is a hold for a 10-year investment until prices drop to around $18.
Garbage collection
Second to Waste Management, Inc. (NYSE:WM) in the US market, Republic Services, Inc. (NYSE:RSG) focuses on the non-hazardous solid-waste segment. The firm recently made the news after announcing a $15 billion upgrade for its Lorain County Resource Recovery Facility. After buying Allied Waste, the company improved its costs and efficiency, digging a small economic moat.
In the short term, Republic Services, Inc. (NYSE:RSG) is facing decreasing waste volumes, cutting revenues short. For the long term, the firm needs to invest in technology to avoid been shorthanded by landfill alternatives, and complete asset upgrades. Additionally, the company will have to live up to its tradition for rewarding green-thinking shareholders. So, if waste volumes do not recover steadily, the needed cash volume to pay dividends, complete upgrades, and innovate may not be available.
Financially, Republic Services, Inc. (NYSE:RSG) is strong. In the last decade, revenue, net income, and cash flow have been on the rise. Debt has also been on the rise, but it remains backed by a healthy cash flow. No less important is the fact that operating margin came in at the high teens for the whole period, and today is above the industry average.
Currently trading at 22.6 times its earnings – a 13% discount to the industry – the stock is undervalued. A 2.78% yield at a $0.22 dividend makes for an interesting long-term investment. Price, however, is close to its 52-week high, and I recommended to hold. Keep looking for a price drop and upgrades to begin before making any investment.
Recycling
Republic Services, Inc. (NYSE:RSG) has failed to recycle materials, and failed behind the competition. At different scales, Covanta Holding Corp (NYSE:CVA) and Veolia Environnement SA (ADR) (NYSE:VE) have turned Waste Management, Inc. (NYSE:WM) into a profitable recycling business. Veolia Environnement SA (ADR) (NYSE:VE) is better positioned to benefit from European regulation, and I recommend as a buy.
Victor Selva has no position in any stocks mentioned. The Motley Fool recommends Republic Services, Veolia Environnement (NYSE:VE) (ADR), and Waste Management. The Motley Fool owns shares of Waste Management. Victor is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Making Profits From Trash originally appeared on Fool.com is written by Victor Selva.
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