EUR 850.00 For Business Accounts Only

Morningstar | Traditional Solid-Waste Pricing Tailwinds Persist in Republic’s 3Q

Wide-moat waste-management specialist Republic Services' third-quarter consolidated revenue grew approximately 4% (adjusting for new revenue accounting standards), to $2.51 billion, roughly in line with our expectations. Relative to the same period last year, the top line increase reflects 2.2% internal revenue growth (2.7% year to date), which was driven by a robust traditional solid-waste pricing backdrop, with another 190 basis points from tuck-in acquisitions. Total average yield (ex-fuel) contributed 2.4%, while volume was roughly a 10 basis point drag--the firm has been intentionally shedding certain low-return residential business.

Republic continues to grapple with weakness in its recycling operations linked to anemic commodity prices for key materials the firm extracts and sells, but healthy solid-waste trends more than compensated for that. Overall, our midcycle revenue and operating margin assumptions remain largely intact and we don’t expect to materially alter our fair $58 fair value estimate.

Republic’s shares are trading in slightly overvalued territory, similar to peers Waste Management and Waste Connections. Recycled commodity prices remain depressed, but the industry leaders are seeing strong 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. Republic is a well-run, top-tier waste hauler but, in our view, the stock price is baking in slightly overoptimistic midcycle revenue and margin assumptions.

Total adjusted EBITDA margin, which excludes restructuring and nonrecurring charges, fell 70 basis points to 28.4% as recycling headwinds more than offset continued strength in the core solid waste operations, which otherwise contributed 80 basis points of margin expansion (including collection, disposal and energy services). Management reiterated 2018 adjusted EPS guidance, which calls for $3.05 to $3.10. It also provided preliminary 2019 guidance, which calls for adjusted EPS of $3.23-$3.28 (versus consensus of $3.27).

Republic is participating at our Management Behind the Moat conference held at Morningstar’s Chicago office on Nov. 7-8, 2018. If you are interested in attending, please reach out to your sales representative for registration information.