Morningstar | Recycling a Headwind, but Traditional Solid Waste Backdrop Remains Healthy in Republic's 2Q. See Updated Analyst Note from 26 Jul 2018
Wide-moat waste-management specialist Republic Services' second-quarter total revenue grew roughly 4% (adjusting for new revenue accounting standards) to $2.51 billion, slightly below our expected run rate due to slower-than-anticipated volume growth in special-waste business. Relative to the same period last year, the 4% top line increase reflects 2.1% internal revenue growth (3.8% last quarter) from traditional solid-waste pricing and volume growth, with another 180 basis points stemming from heightened acquisition activity. Total yield and volume growth approximated 2.1% and 0.6%, respectively. Volume was up 1.4% adjusting for a tough comparison in the specialty waste unit. These factors were only partly offset by continued weakness in the recycling operations linked to anemic commodity prices for key materials the firm extracts and sells. Overall, since our midcycle revenue and operating margin assumptions remain intact, we are maintaining our $58 fair value estimate.At about $71 on July 26, the shares are trading in modestly overvalued territory. Despite near-term headwinds from depressed recycled commodity prices, Republic's traditional solid-waste operations are performing quite well thanks to healthy U.S. economic growth and--this factor hasn't escaped investors--a similar dynamic to peers Waste Management and Waste Connections.
Total adjusted EBITDA margin, which excludes restructuring and nonrecurring charges, fell 180 basis points to 27.4% as recycling headwinds and a lag in implementing fuel surcharges (in a rising fuel cost environment) more than offset continued strength in the core solid waste operations. Management reiterated 2018 guidance, which calls for EPS in a range of $3.05 to $3.10 (compared with previous consensus of $3.05) and adjusted free cash flow of $1.090 billion and $1.115 billion.
Republic Services is a provider of non-hazardous solid waste collection, transfer, disposal, recycling, and environmental services in the United States. The company operates through collection operations, transfer stations, active landfills, recycling processing centers, treatment, recovery and disposal facilities, salt water disposal wells, and deep injection wells. In addition, the company is engaged in landfill gas-to-energy and renewable energy projects and had post-closure responsibility for closed landfills. The company's operations primarily consist of providing collection, transfer and disposal of non-hazardous solid waste, recovering and recycling of certain materials, and environmental services.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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