Garbage hauler Republic Services (RSG) reported mixed fourth-quarter results late last week. We're huge fans of the cash-rich, steady-eddy business models of operators in the waste industry, though we note that Republic continues to work through what we'd describe as a transitional period. Our fair value estimate remains unchanged at this time.
Republic's revenue advanced modestly during the fourth quarter thanks to pricing improvements and fuel-recovery fees offset in part by a modest declines in waste volumes. Adjusted net income and adjusted EBITDA, however, continued to face pressure as labor and maintenance costs advanced considerably from the same period a year ago. Still, the firm's adjusted EBITDA margins came in at an impressive 26.4%. We think the heightened expense pressure is largely a result of underinvestment in trucks/equipment and generally disgruntled employees at recently-acquired Allied Waste (there have been a number of strikes reported recently). Though there continues to be apparent integration pains within its cost structure, we expect the firm to eventually resolve them favorably to the long-term benefit of shareholders.
Looking ahead, Republic expects adjusted free cash flow to be $675-$700 million for 2013 (it generated $768 million in 2012) and earnings per share to be in the range of $1.86-$1.91 for the year. We expect the firm to exceed these expectations, though expense headwinds remain. The company thinks 2013 revenue will advance 2-2.5% for 2013 thanks primarily to improved pricing and acquisitive behavior. We think the company will fall a bit short of that growth range, however, as flat volume (as it is expecting) may be an optimistic assumption. Republic expects its EBITDA margin for 2013 to be approximately 29%, an improvement from the measure registered during the fourth quarter.
All things considered, we love the business models of garbage haulers. However, we note that Republic's free cash flow will face some headwinds in the near term, making its massive net debt position a more concerning situation (it had $67.6 million in cash and $7 BILLION in debt at the end of the year). Our Dividend Cushion recently picked up the increased risk related to its dividend growth profile, and we'll be looking for a tactical exit in the shares, which may happen as soon as next week.
Additional disclosure: RSG is included in our actively-managed portfolios.