By David Berman
You might think that the business of hauling garbage is a stable industry that can thrive regardless of how the economy is performing. But although the solid waste industry is decidedly unglamorous - and unglamorous can be synonymous with defensive - waste is surprisingly exposed to the economy, making it as vulnerable to setbacks as swishy retailers and gold-plated banks.
And right now, Moody's Investors Service is arguing that waste operators are in a tough spot. In a report, the credit rating agency cut the industry's outlook to "stable" from "positive" and warned that low demand from consumers is colliding with weaker pricing from operators. That's a sign that stocks could be stuck in (wait for it ... ) the trash heap.
Waste Management Inc. (WM), the $16-billion sector behemoth is down nearly 4 per cent over the past year, lagging the S&P 500 by a sizable degree. The shares are down about 14 per cent over the past five years. Canada's Progressive Waste Solutions Ltd. (BIN) has also been struggling, with shares down about 25 per cent over the past five years.
"The slow economic improvement has failed to generate meaningful growth in waste volumes, and the pricing discipline maintained by waste operators during the recession is beginning to fade," said Bruce Herskovics, a Moody's analyst, in a note. "We're hearing that customers, particularly cash-strapped municipalities, are pushing back when contracts come up for renewal and we believe that operators are bidding more defensively to maintain accounts."
Garbage gets tossed in good times and bad, of course, but the bad times generate considerably less of it. For example, Moody's points out that waste volumes from U.S. construction and demolition sectors remain weak and are unlikely to rebound this year, offsetting some improvements in industrial waste.
And then there are the dreaded R-words. No, not recession - but rather reducing, reusing and recycling. Can you believe it? Mr. Herskovics points out that there has been a long-developing trend among consumers to avoid sending old junk to landfills, and that has played havoc with residential waste volumes.
At least longer-term investors can look forward to better days, when stronger economic growth, rising employment and more building activity translates into the inevitable: More trash.