One Man's Trash is Another Man's Cash
Entry into the disposable waste service industry requires a huge amount of capital investment, an extensive amount of managerial experience, and of course some good luck. With such an extensive barrier to entry, you could say there is an economic moat surrounding the developed players in the waste industry. Investing in monopolies or, in this case, an oligopoly can be very profitable for the individual investor in the long run. Finding companies with a solid economic moat is the easiest part of the analyst's job. The part that is harder, but not impossible, is finding the value of each player in the oligopoly's industry. After valuing each individual company in the oligopoly, the investor must determine which company best suits their portfolio needs. Finally the investor must determine at what price they should pay for the company that they want. In this article I will attempt to evaluate Waste Management (WM), Republic Services (RSG), and Stericycle (SRCL), the kingpins of trash collecting.
Overview of Waste Management
Waste Management is the leading provider of waste services in North America. WM owns or operates 269 landfills, which is the largest network of landfills in the waste industry. WM also manages 297 transfer stations, which consolidate, compact, and transport waste efficiently and economically. Not only does WM operate an extensive network of waste services all over North America, but they use waste to create energy. The landfills that WM have can produce gas naturally, and that can be used for energy. WM recovers gas as waste decomposes and uses it to power generators that they own. In fact WM owns 17 waste to energy facilities. WM is also really big into recycling. Recycling helps WM extract more and more value from the materials that they manage resulting in higher margins in the long run. Going green is good for the environment we live in and also good for WM business.
Overview of Republic Services
Republic Services is the second largest provider of non-hazardous solid waste measured by revenue. RSG owns 191 solid waste landfills, 195 transfer stations, 71 recycling centers and finally 69 landfill gas renewable energy projects. RSG has 332 collection operations in 38 states plus Puerto Rico. In 2008 RSG acquired Allied Waste Industries for $12.1 billion, plus taking on $5.4 billion in debt from the acquisition.
Overview of Stericycle
Stericycle is in the business of operating regulated waste. The regulated waste that they operate is the medical waste created by medical facilities. SRCL has operations in the following countries: USA, Argentina, Brazil, Canada, Chile, Ireland, Japan, Mexico, Portugal, Romania, Spain, and the United Kingdom. With 153 processing facilities, 141 transfer sites, and 64 recall and returns or communication service facilities; this company is a major player in the regulated waste business. They service over 541,000 customers worldwide. 16,500 include large quantity waste generators such as hospitals, blood banks, and pharmaceutical manufactures. The rest of the customers (524,500) are small quantity generators of waste that include outpatient clinics, medical and dental offices, long-term and sub-acute care facilities, veterinary offices, municipalities, and retail pharmacies. SRCL has also been big in acquisitions. They have completed 299 acquisitions since 1993, 181 in the US, and 118 internationally.
Observing past earnings of a company may not tell you what the future has in store for the company that you are evaluating, but it can help tell you how they have performed in the past. As you can tell from the table that I have provided above, you can see that all three of these companies have not had a negative earnings year in the last 10 years. Using a compounded annual growth rate formula, I have found the following: WM earnings have grown 4.25%, RSG earnings have grown 5.59% and SRCL earnings have grown 17.70%. Finally taking a look at these earnings for each company, I have observed that WM has had down years 4 out of the last 10 years, RSG has had down years 2 out of the last 10 years, and finally SRCL has had down years only 1 out of the last 10 years.
I am also going to use a compounded annual growth rate formula to compare the growth in revenue for each of these three companies. WM rate of revenue growth is 1.84%, RSG rate of revenue growth is 13.89%, and SRCL rate of revenue growth is 17.35%. With SRCL having a higher revenue growth rate, investing in SRCL may increase your investment faster than investing in a company like WM or RSG.
Also as you can see from the table I provided, RSG was only bringing in $3685 in revenue in 2008. A year later after RSG acquired Allied Waste Services, their revenue increased 122.49%. Acquiring Allied Wastes Services has done tremendously good things to RSG revenue intake.
Getting a huge amount of revenue from one single customer can bring trouble down the road for a company. For an example, let's say company XYZ sells products to company ABC. XYZ also brings in 25% of revenue from company ABC. One day company ABC declares bankruptcy. Since company XYZ obtains 25% of their revenue from company ABC, and ABC is now out of business, now XYZ is going to be out of 25% revenue. It is like a domino effect. WM, RSG, and SRCL's largest customer represents less than 1% of their revenue, respectively. This is a great sign of continued cash flow, and prosperity to each of these companies.
Debt to Equity Ratio
Operating Cash Flow
Observing these common key statistics of companies can tell you quite a lot of information about each company that you are evaluating. The first thing that I noticed is that all three of these companies are overvalued compared to the S&P 500, when you look at P/E and P/B ratios (excluding RSG with its lower P/B ratio). SRCL is also the highest priced company at the moment as well. I believe that it is priced higher compared to WM and RSG because of its higher profit margin. Its higher profit margin thus leads to a higher EPS, more money and finally a higher share price. WM pays out the highest dividend, followed by RSG, and SRCL does not pay a dividend at all. The payout ratio for WM is 73.00%. Seeing WM paying out 73.00% of the revenue they generate sends messages to shareholders that they do not know what else to invest the money they make in, so they pay the shareholders back. RSG also pays out the exact same ratio as WM, 73.00%. Typically WM and RSG are considered stalwart companies, you will not see your investment double overnight with these ones.
WM, RSG, and SRCL are very good, well managed, cash generating, dividend paying (excluding SRCL) companies. You could hypothetically invest in all three of these companies, and have fun in life instead of worrying about your "stocks". At their current value though, I would hold off on putting money into these companies. Remember Mr. Market is a manic depressive fellow who is bound to give you some very good deals in the future. Save your money and keep an eye on these companies. When Mr. Market is in a bad mood, drop a boat load of cash on one of these companies when the time permits (do your due diligence as well). WM and RSG are good slow growing stalwarts which pay a hefty dividend payment for all of the income oriented investors out there. Or if you are looking for more of a growth company, invest in SRCL. If you ever do decide to invest in the waste industry, just remember to buy at a margin of safety to get the best buck for your dollar.