EUR 850.00 For Business Accounts Only

Morningstar | Recycling Facing Headwinds, but Republic's Traditional Solid Waste Business Firing on All Cylinders

Following right behind industry behemoth Waste Management, Republic Services enjoys dominance in landfill ownership. As a fully integrated waste hauler, it leverages a vast network of collection routes, which bestow significant control over the waste stream, funneling trash from commercial, industrial, and residential end markets into its landfills. In our view, intangible assets (immense regulatory hurdles to new landfill ownership) and substantial route density have enabled Republic to carve out a robust competitive position that’s supported healthy core-pricing gains over the past five years. Outside the large public providers that make up roughly 45% of industry revenue, size falls off quickly and the market becomes fragmented.Republic in its current form was born out of the 2008 merger of Allied Waste and Republic Services, which forged the second-largest U.S.-based solid waste company. The timing of the transaction was less than ideal due to the ensuing economic recession that drove down pricing and volume across the waste industry. Even into the initial stages of the economic recovery, residential construction activity remained stagnant, weighing on most waste haulers’ volume trends through 2013. More recently, however, acceleration in U.S. macroeconomic growth (including strong housing activity) and healthy execution have reinvigorated volume growth while supporting solid pricing. Although Republic’s traditional solid waste operations are enjoying macroeconomic tailwinds, its recycling division has encountered painful headwinds--prices for recycled commodities the company extracts and sells, particularly old corrugated cardboard, have plummeted on China’s decision to suspend most import licenses during the second half of 2017. However, we expect these headwinds to stabilize somewhat as the company aggressively manages facility operating costs and finds other outlets for its recycled commodities. We expect Republic to continue focusing on tuck-in acquisitions, and its ability to raise core price on acquired volume (thanks to its vast ownership of a landfills, a preferred asset) should continue to support solid free cash flow generation in the years ahead.