I love the waste industry. In my former life as an investment banker, I worked with a waste management client and spent several months getting my hands dirty (no pun intended) learning the ins and outs of the industry. There are very few industries where a company is guaranteed demand for its services and can often generate revenue from the very product that it is paid to haul away (i.e. sale of recycling materials, gas collected from decommissioned landfills or electricity from waste-to-energy plants). It is also an industry where a vertically integrated company can dominate a geographic area simply by owning a few key pieces of the waste puzzle.
The chief components of the industry are the disposal trucks and related infrastructure, landfills, recycling facilities and waste-to-energy plants. Disposal trucks and their related infrastructure are easy to acquire, however, collecting trash is only the first step in the process. Unless a company has a favorable landfill contract, then it will lose money on the disposal end of the transaction. The environmental and regulatory permitting as well as geographic parameters (size, location away from NIMBY types, etc.) required to operate a landfill function as a two-edged sword. While it may be difficult to open a landfill, those same obstacles help keep competitors out of the market. For example, one of the fifteen largest municipal areas in the United States is served by only one landfill. By purchasing this landfill, one large waste company was able to guarantee that it would control the entire market as the landfill's current contracts with smaller waste collectors expire.
The past few years have been very favorable for the waste management industry as municipalities across the country have chosen to privatize their waste collection functions in order to save money in an era of tighter budgets. This has created numerous opportunities for small companies to win contracts for the waste disposal in various cities and towns. As described above, though, the big players are utilizing their financial strength to purchase the landfill bottlenecks in order to control the larger, more lucrative markets. These markets are lucrative simply because more trash can be collected (and thus more fees) with fewer resources expended as the population is concentrated. As cities continue to grow, these markets will only continue to become larger and more lucrative. Thus the larger players in the market stand to increase their top line revenues through consolidation and demographic shifts.
Below are eight of the top 50 waste companies in the U.S. as compiled by Waste 360, an excellent industry resource.
Waste Management (WM) - Waste Management is the largest waste management company in the U.S. and has leveraged its resources to branch out into various related industries (i.e. port-a-john servicing, medical waste collection, etc.). The company has also invested in over 1,000 waste collection trucks that run on compressed natural gas. Not only do these trucks offer the benefit of cleaner emissions, they also offer significant fuel savings over the life of the trucks. Waste Management is a mature company with a history of increasing its dividends and offers investors stability, a 4.2% dividend and the prospect of some limited growth as the amount of waste it handles increases.
Republic Services (RSG) - Republic is the second-largest waste management company in the U.S. and has not diversified into related industries like Waste Management. Instead, Republic has chosen to focus on commercial and household waste collection and disposal in the U.S. and Puerto Rico. Currently the company is trading at a lower P/E ratio than Waste Management, however, Waste Management's diversity and strong history of increasing its dividend probably makes it the better investment.
Clean Harbors (CLH) - Clean Harbors specializes in hazardous waste collection and disposal as well as environmental and oil and gas services. The company has traded as low as $47 and as high as $70 over the last 12 months and is currently at $52.90. Clean Harbors recently acquired competitor Safety-Kleen for $1.25 billion financed through a combination of cash on hand, proceeds from a common stock offering and the issuance of senior notes. The acquisition should be immediately accretive and dramatically expands the company's environmental services arm. Between the company's exposure to the booming oil and gas industry as well as the continued demand for environmental services, Clean Harbors is poised for significant growth.
Veolia Environmental (VE) - Veolia is a French waste management company with significant operations in the United States. Over the past two years the company has run into financial troubles and fallen from $30 to $12. Veolia currently offers a 6.4% dividend and appears to be on a better financial footing, but, despite its position as the fourth-largest waste management company in the U.S., I would avoid the stock. Any financial hiccups or a reduction in the dividend could cause the stock to fall further and, while there is significant upside, the risk associated with the upside is quite high.
Stericycle (SRCL) - Stericycle provides medical waste disposal services to clients both in the U.S. and abroad. The company has grown into one of the largest waste management companies in the U.S. through both bolt-on acquisitions and organic growth. Stericycle's aggressive growth strategy has resulted in two 2 for 1 stock splits over the last 10 years. The company has chosen to re-invest its earnings in expansion and does not currently pay out dividends. Over the last year the company has returned 15% and offers investors a financially strong company in an industry that still offers growth prospects. The only significant downside to the stock is potential fall-out from the Patient Protection and Affordable Care Act that could result in reduced margins for the company.
Waste Connections (WCN) - Waste Connections focuses primarily on waste collection and disposal in secondary markets, although the company also offers rail waste shipping services. The stock is trading near its 52-week high, has a P/E ratio higher than either Republic or Waste Management, and only offers a 1.2% dividend payout. The company acquired R360 Environmental Solutions in late October 2012, which will allow it to expand its offerings in the oil and gas environmental waste disposal sector. Despite the company's prospects for growth, I would avoid Waste Connections and invest in one of the other waste management providers listed here.
US Ecology (ECOL) - Along with Stericycle, this is one of my favorite companies in the waste sector. Based in Boise, Idaho, US Ecology provides disposal services for hazardous waste, in particular radioactive waste. With locations in Canada and throughout the western U.S., the company is well-positioned to continue its growth - it hit record earnings in Q3 of 2012. In addition to its strong growth prospects (over the past year the company has climbed from ~$18 to $22.81), the company provides investors with a 3.2% dividend yield. Although the stock is thinly traded, it is well-worth further research by investors looking to add a waste management company to their portfolio.
CSX - CSX presents investors with a play on the long-haul transportation of a wide range of waste materials. The company is the largest rail transporter of waste in the U.S. and, despite it being primarily a rail transportation company, it ranks 27th among U.S. waste companies. As cities expand and current landfills reach capacity, long-haul transportation of waste to cheaper and less regulated locations is becoming an attractive solution. CSX will benefit from this transition and offers investors exposure to a diverse array of industries.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.