In our world of consumable convenience, the solid waste industry has had a nice run. Now, the industry is under pressure due to a variety of factors, including movements to increase compostables and recycling. I am going to take a look at some of America's largest solid waste companies to see how they are coping with the increased competition, both internally and externally.
Waste Management (WM) is the largest solid waste company in North America. At year end 2011 it had about 270 landfills, 600 collection operations and 345 transfer stations across North America. It has over 40,000 employees.
The waste collection business is not a growth industry. It is about as mature as any industry there is. Growth in revenues and profits comes from extensions and acquisitions. The extensions for Waste Management in recent years have been on its unique version of clean energy. At present, it was gas gathering equipment at about half its landfills, and obtains about 550 megawatts in capacity, enough to power nearly half a million homes. That is roughly equivalent to a mid-sized coal plant. The company has a business of partnering with public land fills owned by cities, and between its own and those third party sites it manages, has a goal of increasing its overall energy capacity to 2 million homes by 2020. Now, one might argue that landfill gas is hardly "clean energy." But the fact remains that the energy source is not foreign, no mountains are blasted to get at it, and it is renewable in human time, not geologic time.
Otherwise, there is not a lot going on at Waste Management. Earnings in the second quarter of 2012 came to $0.52 per share, a mere 4% above the year before. Overall earnings have been essentially unchanged since 2007. In that year, earnings came to $1.08 billion, or $2.07 per share. Earnings this year are likely to be around $1.0 billion, or $2.17 per share. The company has retired over 25% of its stock through repurchases since 2002, and offers a fine yield of 4.2%. But there will be no income growth this year. By next year, synergies from Waste Management's 2011 purchase of Oakleaf kicks in, earnings growth should resume.
Waste Management will not ever excite anyone. But as a leader in a stable industry and a generous dividend, this high quality holding should appeal to income seekers and conservative investors.
Stericyle (SRCL) is the country's leading niche waste handler. Its "niche" is medical waste, and it is the only company with a national presence in the field. It handles waste not just domestically, but also throughout North America and Europe. It handles this waste through a network of 175 processing centers and 154 transfer sites.
Unlike the saturated solid waste business, Stericycle's medical waste business has been growing fairly consistently. Compared to Waste Management's average revenue growth of just over 2% the past five years, Stericyle has increased its revenue an average 19% over the same period. Income growth has averaged 19.5%. Much, though not all of this growth has been fostered by acquisitions.
Going forward, there is much to like about Stericycle's prospects, both domestically and internationally. The medical waste business is so fragmented, more acquisitions are nearly certain. The issue to me is its valuation. It is trading at a price to earnings ratio of 28, and a PEG of 1.85. Both of those ratios are too rich for my blood, and I would urge looking elsewhere unless or until Stericyle becomes more reasonably valued.
Republic Services (RSG) is another top tier solid waste concern, who under its own name and various subsidiaries operates 191 landfills, 194 transfer stations, and 74 recycling centers. It picks up curbside trash in 39 states, utilizing over 300 collection companies.
Republic made a substantial recent move in its renewable portfolio by inking a deal with a subsidiary of Clean Energy Fuels (CLNE) in which Clean Energy will build a natural gas processing facility at Republic's North Shelby Tennessee facility. By late 2013, the facility will generate the annual natural gas equivalent of 4 million gallons of diesel fuel, and is supposed to ramp up to near twice that by 2023. That would be enough to keep 400 of Republic's fleet of trucks on the road for a year.
Republic has managed its business effectively in recent years, averaging revenue and profit increases 9% and 8% respectively over the past five years. Republic is also active acquiring companies, and is likely to spend over $100 million acquiring numerous smaller waste companies this year. But all the growth Republic has experienced over the years has come with a cost. According to a recent article in the Wall Street Journal, Republic carries on its balance sheet goodwill in an amount roughly equal to its market capitalization of about $10 billion.
Other than that, Republic is a mediocre choice for many investors. It pays an above average 3.4% yield, trades at a price to earnings ratio of 15, and has a PEG of 2.1. At these numbers, I don't expect it to perform better than the average equity over the next 12 to 24 months.
There are still a great many small, often privately owned solid waste companies that might soon be on the menu for a company like Waste Management or Republic. One such company is Junk It, a Toronto based, privately held company that recently celebrated its tenth birthday. It offers a full array of everything from do it yourself, to dumpster rental, to "white glove" trash removal service in the Toronto metropolitan area. With its friendly web site, Junk It would make for a fine tuck in addition for a larger North American waste company.