Waste Services Industry: Trash to Treasure

While the markets are in complete turmoil and the overall Industrial sector seems to be in a bearish environment, the waste services sub-industry has managed to stay afloat. The waste services industry is very simple: it is comprised of companies that collect, transfer, recycle, and dispose of garbage. It is an industry that has few competitors and very stable demand. Let’s face it - there will always be garbage that needs to be disposed.

So to give you an introduction to the industry, there are three major competitors:

Waste Management (WMI): Waste Management offers trash collection, transfer of waste services, recycling, disposal and waste-to-energy conversion services. In addition it rents and services portable restroom facilities, provides street and parking lot sweeping services, offers portable self-storage and fluorescent lamp recycling services and other industry related services. These additional services help the company separate itself from the competition in a fairly monotonous industry. Geographically, it is located all throughout North America and services regions all throughout the United States.

Waste Connections (WCN): Waste Connections is a solid waste services company that provides solid waste collection, transfer of waste services, disposal, and recycling services. It is much smaller than Waste Management and is exclusively based in the southern and western regions in the United States.

Republic Services (RSG): Republic Services provides solid waste collection and disposal services for commercial, industrial, municipal, and residential customers in the United States. It is the smallest of the three big waste services companies and it operates throughout the United States. However it is not as concentrated as Waste Management in many of these areas.

The major differences between the three of these companies are their market caps and the geographic regions which they serve.

A Historical Perspective

This sub-sector seems like an ingenuous “safe-haven play” in my opinion. To better rationalize this, let’s take a more historical look at this sub-sector’s performance in a recessionary time period. In the March-to-November 2001 recession, the S&P Index returned -8.91% (calculated from 3/1-11/30). To get more sector specific, the Industrial Select Sector SPDR returned -8.66% over the course of that recession (calculated using the same dates as above). Here are the returns of the three major companies in this sub-sector (calculated using the same dates as above):

• Waste Management: 18.88%
• Waste Connections: -6.55%
• Republic Services: 2%

All three companies had substantially outperformed both the S&P Index and the Industrials Select Sector SPDR. I feel that the industry’s concrete management as demonstrated through returns, and consistent revenue, as well as demand streams make these companies a perfect play in a recessionary time period.

Effects of High Oil

One of the concerns regarding this industry is the volatility of oil. Over the course of the past few months we have seen oil trade as high as nearly $150 a barrel and as low as $92 a barrel. Most companies that are highly dependent on transportation have seen a large impact to the downside in their stock price due to the volatility of oil. Companies like UPS (UPS), FedEx (FDX), and UAL Corp. (UAUA) have seen large slides in their stock prices due to increases in fuel costs. However, the waste services industry has dealt with the instability of oil very well. Its stock prices do not reflect the same drop due to the volatility of oil that other transportation dependent companies have faced.

How can an industry that is highly dependent on fuel manage to mitigate the risk of high oil prices? There are two key reasons why this is so:

• Many of the Waste Services companies have implemented ways to hedge against high oil. For example, Waste Management has a fuel surcharge program that is designed to minimize the damage done to margins from high and volatile oil.
• As stated above, there is very consistent demand for the service and thus a fairly consistent revenue stream based on the demand. There will always be a need to collect trash and dispose of it.

Current Events in the Industry

There are a series of mergers and acquisitions that have either taken place or are in the midst of possibly happening. The industry itself already has only a handful of competitors and as of late the trend looks like there may be even fewer than before.

Let's start with the planned merger of Republic Services and Allied Waste (AW). Allied Waste is a small waste services company based out of Phoenix, Arizona. This merger, with Republic Services in the driver’s seat, is expected to generate $150 million in pre-tax synergies, which according to analysts are expected to be almost all exclusively via cost savings. These pre-tax synergies are only expected to be about 1.6% of sales, but have the potential of adding 13% to the combined market caps. The merger was announced on June 23, 2008, but the companies remain separate entities as of now.

Waste Management is in the process of trying to acquire Republic Services. Waste Management had made an original bid of $34/share for RSG; however, that offer was rejected by Republic Services. Nevertheless, on August 11, 2008, WMI increased its bid by 9% to $37/share. Currently, there is no decision by Republic Services regarding the offer. The acquisition of RSG would make WMI even more of a force in this industry than it already is. This is assuming that it pays a reasonable price for the company. In my opinion, that is the sole risk factor that faces Waste Management in regard to this acquisition.

Summary

Overall, I’m bullish on the waste services industry. I feel that with the stable demand for the service and the historical performances of the larger companies in this sub-sector make it a very recession proof, attractable, “safe-haven play”. They have shown proper management in regards to the volatile oil and overall commodities market. In my opinion I would stick to the larger cap plays in this industry. such as Waste Management, as they have proven to have a stellar track record in down times. I feel that this is a great industry to invest in while there is so much uncertainty and volatility in the overall markets.

Disclosure: None.

Comments

[ATLBob:]

This article seems light on accuracy, devoid of current performance analysis and it fails to properly present several ongoing events in the industry.

Allied Waste Allied isn't the small operation that you have characterized in this piece: it owns the second-largest (after Waste Management) domestic network of landfill operations in the US and their mangement team has agreed to the merger with Republic Services, the 3rd largest operator. Shortly after the AW/RSG merger announcement, WMI made a hostile takeover offer of RSG in order to sabotage the merger activities , since the combined company will become a much more powerful competitor to WMI.

Additionally, RSG has rejected Waste Management's $37 cash bid, citing its commitment to merging with AlliedWaste, which it believes offers better long-term value.

Finally, Bill Gates Cascade investment company has been buying large blocks of RSG stock and has come out against the hostile offer from WMI, which it has characterized as a tactic to stifle competition.

2008 Sep 22 09:33 AM

[mcain:]

All I can say is Mahir Desai you need to get your facts straight on this article. #1 Allied Waste is not a small player from Arizona they are the number 2 company in the industry with revenue of 6 billion formerly BFI. #2 Waste management is trying to stop the merger between the two so they can buy RSG. if you are going to post a article on the web please do a little research because of now you are very credible. Allied a small waste service company out of Phoenix C'mon!!!!!

2008 Sep 22 02:01 PM

[Billy Staples:]

Guys, look at it this way....I spent many years in the biz, residential and mostly commercial in NY metro area. so kinda seen it all from the front to the upper view, either way it smells I have been told. After awhile you don't notice.

this I noticed. It wasn't too long ago, right over the (excuse spelling ) Kosciusko Bridge in brooklyn, around the BQE( for non NYers, just before Manhattan, sat the 2 biggest waste companies in the country, right down the block from each other. One was Waste Management, who in my opinion was the smaller of the 2 and not the big name. down the block, both with their own transfer stations etc, was the pretty and very difficult to do, clean trucks for BFI. Browning Ferris Industries. If you watch movies from the 80's onward, when ever you see dumpsters in it, they are thespecial oclor Blue' of BFI. Ironically, our blue was the blue my company used and I guess mixed or chose whatever, so they called it our company's name 'Blue'. Insignificant bit of oddball news. Whenever you had the prerequisite front end loader (the truck with the forks that empties the container through its roof) is backing out of an alley in a movie chase scene a lot of times its the blue BFI. what I am saying is they were all over the country. I even told my bro in law at the time to check them out as he was into stocks and had money, i was neither, and realistically still aren't!!!

Than one day, it just hit me. where the hell Did BFI go. No more pretty blue containers. They were bought out, taken over, merged, still not sure by or with Waste Management, which immediately became the big kid on the block.

Here is a rule of thumb guys. If a company owns or runs it's own landfills and doesn't have to dump the garbage they pick up in a municipality, they are saving millions. dumping fees were out of control toward the end of the truly 'private' sanitation companies, the mom and pops if you will. Even thought they weren't small or inexpensive to run.
If you have your own landfill, you bring your loaded trucks in, save up to sometimes $1,000 or more if its raining or you are loaded with 'slop'. A garbage term for food from diners(ok outside of NY, Denny's Perkins, waffle house), restaurants, fish places, anyplace where food is thrown into a dumpster, it weighs a considerable amount. At one point we had scales in the truck weighing each container, the dumping fees were out of control
If you went to dump a roll off from a diner or similar to above, example catering halls, where they needed something bigger, they had compacters built into them and you'd pick those bad boys up and flip them around to dump and vice versa, again....some of the heaviest and wear and tear on trucks, drive shafts, tires and universals would snap.


so imagine not paying for that? when you could shop around for the best place if and when your landfill got closed, like all are in NY. Many are still open but for construction debris and guys watch you dump to make sure, no tires, nothing. even clean fill, which you used to dump for free, dirt, top soil etc than it it had one piece of wood you paid for 20 yard roll off of dirt of cement...think of the tonnage.

OK, I enjoyed my trip down memory lane, but that is what killed private sanitation in NY metro area. Anyone recall the infamous garbage barge, that had no place to call home. dumping fees were so outrageous here that well some companies were forced out of business.

the final point is anyone left standing today is no small potatoes. I don't care where they are or if centralized in one area. a small company would have almost an impossible time making it now. the towns wound up taking over routes. Only private companies that filled voids for the WMI, AW and republic etc made it.

as I used to say and tell my boss, especially at raise time...
'there's gold in them there pails'. Nothing could be truer the longer it goes on. Until we go soylent green, there will always be waste.

I bit of an insiders view and I am for speaking tours at bar mitzvahs, sweet sixteens and Holiday parties, not to mention Christenings.

I love the commercials I think for waste mgmt, all the guy does is drive around town, smiling as lights go on and doesn't pick up a damn thing. No slop leaking out the back gate, nothing flying off the roof onto windshields and no rats climbing onto your cab and hanging onto your mirror. ahh the good ole days

Staples

So no such thing as small. Even if you are speaking of in relation to. I've moved on, buy a t-shirt! Support a teamster on a withdrawal card for too many years to count!

thedarksize.com

or have a laugh with stocks at
thedowJokesreport.com

2008 Sep 23 11:18 AM

[mcain:]

Now you need to do your research too. Waste Management has always been the big boy my friend and as far as running a small company now I'm doing it and growing at a considerable rate. The problem with the big boys is customer service which will always leave room for competiton. And on side note again BFI was bought out by Allied Waste.

2008 Sep 23 11:53 AM

[fuba:]

Please take this down! How does one covering (or at least trying to cover) the industry not know who the second largest player is?! Also, Republic has already rejected the $37 offer. Good thing the Nittany Lion Fund is only giving you $5 million to blow.

2008 Sep 23 01:34 PM

[rb jones:]

Good observation!.........W... why there is more garbage picked up during slow times tho.

2008 Oct 01 01:02 PM

[Vinny Eldorado:]

F**k WM...They couldnt even get in New York..They would try and the wise guys would smack them up. If its was'nt for Rudy WM would of never got onto New York

2008 Nov 06 07:31 PM