Should You Add Garbage To Your Portfolio?

 |  Includes: CLH, RSG, WM
by: Bill Maurer

Garbage. Nobody likes it. Nobody wants to take it out or drag the can down to the curb. We can't imagine ever being the people that come and take it away. Let's face it, garbage stinks. But it might be the perfect thing to add to your portfolio. Since I only have a short time to keep hold of your attention, I'll only focus on three names: Waste Management (NYSE:WM), Republic Services (NYSE:RSG), and Clean Harbors (NYSE:CLH).

Now let's look at how they've done over time. Yes, I know, past results are not indicative of future performance, and the last 10 years have been unlike any other we've seen. I get it, but whatever. Let's look anyway. This table shows the multi-year performance against three index ETF counterparts. The SPY is of course the S&P 500 ETF, the IWD is the Russell 1000 Value Index ETF, and the IWF is the Russell 1000 Growth ETF. Given the market caps of these companies, you would expect them all to be in the Russell 1000 essentially, although CLH may just be on the fringe. Now over the past year, only Clean Harbors has done better. But when you go longer out, you'll notice the outperformance. And since I'm pitching WM and RSG as value plays and CLH as a growth play, you can compare them to whichever index you so please. I'd match them to value and growth, myself, but you're free to choose.

Ticker 1-year 3-year 5-year 8-year
WM -3.70% 4.16% 7.59% 56.80%
RSG -4.45% -0.28% 28.80% 125.88%
CLH 71.70% 61.08% 165.83% 1859.93%
SPY 9.18% 5.37% 0.84% 36.11%
IWD 5.50% -0.88% -12.89% 35.22%
IWF 14.69% 16.50% 16.89% 40.95%
Click to enlarge

Now let's get down to some analysis. Waste Management is your traditional garbage collector. Everyone has probably seen one of their green trucks at some point. This is a good value play, offering a 4.3% yield, with the ability for some growth as well. Revenues and income dropped off during the recession, but have come back steadily since. The company projects 5.7% revenue growth this year and 4% next year. While only forecasting 2% EPS growth this year, next year's forecast calls for 14%. If you exclude a one-time item, this quarter's numbers showed nice margin improvement over the prior year's quarter, and margins are forecast to increase a little more next year as well. The company's short term liquidity ratios are in very good shape and have actually improved over the first half of 2011. The company's cash flow in the most recent quarter was down from the previous year, but only due to less borrowings. I would like to see the company trim some of its almost $9 billion in debt (which represents about 60% of its liabilities), or at least refinance it while rates are low. However, I'm not too concerned as interest expenses only equal about 3.5% of revenues. You can view their most recent 10-Q here. All in all, this is a solid company. They have increased their dividend every year since 2004. Everyone knows garbage needs to be collected, and these are the go to guys. With times as uncertain as now, a 4.3% yield adds a nice level of comfort.

Republic Services isn't as large as Waste Management (2/3 of the market cap), but offers higher gross and operating margins than WM. The company offers a solid 3.1% yield, and the dividend has increased each year since 2003. Revenues aren't growing as fast as WM currently, but EPS growth for this year is larger and similar growth for next year. Analysts are fairly bullish on the stock, more so than for WM, as all those covering it appear to have some form of a buy rating. Most covering WM have a hold. RSG's short term liquidity numbers trail those of WM due to more short term debt, which the company has been rolling into longer term debt over the past year. However, the long term solvency numbers for RSG appear to be better. You can check out the table at the bottom for 3 quick financial ratios. The company also announced in August a share repurchase program, which will buy back $750 million in shares by the end of 2013 (about 7.5% of shares outstanding currently).

Clean Harbors is more of a growth play, and is not a traditional garbage collector. They are more into the hazardous waste collection business. As such, their margins will be lower than the other two traditional waste business I've already discussed. However, the company offers more projected revenue growth than the other two, at 7% this year and nearly 13% next year. While EPS numbers are forecasted to drop a bit this year, they are seen rebounding next year. Some Analysts favor the stock, with about half having holds and half having buys. However, price targets range from $58 to $70, providing decent upside from the current price of $56. Being just a $3 billion company compared to the $11 billion RSG and $15 billion of WM, you would expect this stock to move more, and it will. As you saw in the chart above, the growth numbers have been pretty nice. This would be a good candidate for a growth play in the waste industry, as the other two were value plays. Clean Harbors does not currently pay a dividend.

The table below shows three quick financial ratios I like to look at when I analyze a company. I don't see any red flags here, although you might be worried about the drop in Working Capital for WM. Don't be afraid though, they recently issued $500 million in new notes. All three stocks appear to be in good financial position, and I don't see these numbers getting terribly worse anytime soon, but I'll check back in at the end of the year just in case.

Current Ratio Working Capital Debt Ratio
Ticker 6/30/10 6/30/11 6/30/10 6/30/11 6/30/10 6/30/11
WM 1.10 1.03 $298 $79 70.55% 69.31%
RSG 0.52 0.67 ($1,177) ($724) 60.73% 61.05%
CLH 2.34 2.66 $431 $541 55.95% 56.37%
Click to enlarge

These are three solid names that could add some nice balance to your portfolio. Two of them are more value plays, offering nice dividend yields, while one is more of your traditional growth play. This world is producing more and more garbage each day, so why not make some money off of this business? I wouldn't jump in right away. I would be sensible and wait for the next down move in this market where you will probably get them a couple of percent lower.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.