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Morningstar | Republic Finishes 2018 With Robust Yield Showing

Wide-moat waste-management specialist Republic Services posted 2.6% consolidated top-line growth in the fourth quarter (adjusting for new revenue accounting standards) and didn’t deviate drastically from our expectations. Relative to the same period last year, revenue growth reflects 2.3% internal growth (2.8% for the full year), which was driven by a continued favorable traditional solid-waste pricing backdrop, with another 30 basis points from tuck-in acquisitions. Total average yield (ex-fuel) contributed a very healthy 2.7% (the strongest since 2009), while softer volume created a 70 basis point drag. The muted volume trends are not a 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, total collection and disposal volume would have been up around 90 basis points, suggesting traditional solid waste demand conditions remain sound. The firm is still seeing weakness in its recycling operations linked to anemic commodity prices for key materials the firm extracts and sells, though this headwind is showing signs of diminishing.

Since our midcycle revenue and operating margin assumptions remain largely intact, we don’t expect to materially alter our fair $59 fair value estimate. As we incorporate full-year 2018 financials into our model, we expect any fair value adjustments to be minor and upward trending. As of market close on Feb. 7, Republic’s shares are still hovering in modestly overvalued territory, similar to peers Waste Management and Waste Connections. Recycled commodity prices are depressed, but the industry leaders are posting impressive growth within their traditional solid-waste operations on the back of U.S. macroeconomic tailwinds (including solid housing starts over the past year), and this dynamic hasn’t escaped investors.

Total adjusted EBITDA margin, which excludes restructuring and non-recurring charges, fell 80 basis points to 27.4% as recycling headwinds more than offset continued strength in the core solid waste operations, which otherwise contributed 10 basis points of margin expansion. Management’s reiterated 2019 guidance, which calls for adjusted EPS of $3.23-$3.28 (versus Street consensus of $3.27).