EUR 850.00 For Business Accounts Only

Morningstar | Core Solid Waste Yields Continue to Shine in Republic Services' 1Q

Wide-moat waste management specialist Republic Services posted 1.3% consolidated organic top-line growth in the first quarter, roughly in line with our expectations. Relative to the first quarter of 2018, growth reflects continued favorable pricing conditions across the traditional solid waste industry (aided by several years of positive U.S. economic growth) and progress converting customers from CPI-based pricing to a waste-related index. Total average yield (excluding fuel) contributed a very healthy 2.9%, the strongest showing since 2009, while softer volume posed a 150-basis-point drag on internal top-line growth. While slightly softer than we anticipated for the quarter, muted volume trends are not a complete surprise and stem from ongoing efforts to shed low-return residential and broker-related business; difficult comparisons for special waste activity also played a role. Ignoring those factors, underlying collection and disposal volume would have increased 60 basis points, suggesting solid waste demand conditions remain sound. Republic is still seeing weakness in its recycling operations linked to anemic commodity prices for key materials the firm extracts and sells, though robust traditional solid waste pricing is more than offsetting that, and we’ve already baked continued declines into our 2019 forecasts.

Since our midcycle revenue and operating margin assumptions are largely intact, we don’t expect to materially alter our discounted cash flow-derived $61 fair value estimate. The shares are still hovering in modestly overvalued territory relative to our longer-term expectations for top-line, profitability, and free cash flow growth--similar to peers Waste Management and Waste Connections. Several industry leaders are seeing very healthy trends in their traditional solid waste operations thanks in part to solid single-family housing starts (which lead waste industry trends) in recent years, and this dynamic hasn’t escaped investors.

Total adjusted EBITDA margin, which excludes restructuring and nonrecurring charges, fell 50 basis points to 28.3% due to the expiration of certain tax credits that were included in operating income last year and the anniversary of several large event-driven projects that carried high margins, partly offset by strength in solid waste yields. Management reiterated its 2019 guidance for adjusted EPS of $3.23-$3.28.