You’ve no doubt seen the NetJets ad featuring Warren Buffett and Bill Gates, all cozy together at 35,000 feet, their shoes kicked off, a card game in progress, a bowl of jelly beans in front of them. Could there be two more like-minded billionaires?
But when it comes to garbage hauling stocks, they’ve apparently gone their separate ways. Republic Services (NYSE:RSG), the country’s No. 2 trash hauler, until some point during the third quarter had the distinction of counting both the Microsoft (NASDAQ:MSFT) founder and Berkshire Hathaway (NYSE:BRK.A) CEO among its largest shareholders. At its last SEC filing, Gates’ personal investment vehicle, Cascade Investment LLC, held about 55 million shares of Republic, or about 15% of the shares outstanding. Buffett’s Berkshire held about 11 million shares, but, according to a 13-F filing this week Berkshire sold its entire Republic stake during the third quarter.
Not exactly a vote of confidence in Republic’s management after it more than doubled the size of the company with its 2008 acquisition of Allied Waste for $12.1 billion, including debt assumption.
Republic was the biggest holding entirely liquidated by Berkshire during the quarter, at a value of about $322 million.
Buffett also zeroed out his holdings in Iron Mountain (NYSE:IRM), CarMax (NYSE:KMX), NRG Energy (NYSE:NRG) and Home Depot (NYSE:HD). And Berkshire cut its Nike (NYSE:NKE) holdings by about half. Buffett could merely be raising cash for something else, with no slight intended to these fine companies. But if you’re Republic – a company that, even in the best of times, gives off a certain odor with its nearly 200 garbage dumps – losing the Buffett association has to hurt.
Does Buffett know something that Gates doesn’t? Seems unlikely, given that since October 2009 Gates has had his own guy on the Republic board, one Michael Larson, “chief investment officer to William H. Gates III and is responsible for Mr. Gates’ non-Microsoft investments as well as the investments of the Bill & Melinda Gates Foundation Trust.”
The essential fact of the waste industry – dominated by No. 1 Waste Management (NYSE:WM) and Republic — is that it’s slow-growing. If you don’t throw it out, they can’t pick it up and bury it. Trash grows – and shrinks – with the economy, which is why Republic handled 4.3% less of it during the first nine months of 2010 than it did a year earlier.
Plenty of other industries grow slowly. But ones selling more sophisticated services and products, or manufacturing high-value stuff, have a greater ability to do two things: raise prices as the goods and services offered increase in value; and reduce costs by becoming more productive.
That’s hard in trash. The service is making it go away. Period. And beyond efficiencies realized by building massive dumps to replace little ones, you still need one driver for each truck. (During the 1980s, getting municipal officials to believe there was a shortage of dump space helped waste companies raise prices a lot, but that myth has been shot down repeatedly.)
Republic has some fundamental flaws. Its liquidity, as measured by current account, is low.
Its debt, after years of being modest, is now huge.
And Republic shares aren’t cheap, trading as if there’s still some growth left in the company.
Buffett just may know more about garbage than his young friend, Bill Gates.