Municipal Solid Waste Trends And Changing Demographics

Includes: RSG, WM
by: Nick Chiu

Investors need to be aware that growing prosperity and urbanization could double the volume of municipal solid waste (MSW) annually by 2025, as reported by the Worldwatch Institute for its Vital Signs Online service. MSW consists of organic material, paper, plastic glass, metals, and other refuse collected by municipal authorities. MSW is a subset of the larger universe of waste and typically does not include waste collected outside of formal municipal programs. Nor does it include the sewage, industrial waste, or construction and demolition waste generated by cities.

U.S. generates the most MSW

As stated in the report, MSW tends to be generated in much higher quantities in wealthier regions of the world. Members of the OECD, a group of 34 industrialized nations, lead the world in MSW generation, at nearly 1.6 million tons per day. The U.S. leads the world in MSW output at some 621,000 tons per day, where China, in the second place, generates close to 521,000 tons.

Type of Wastes

Urbanization and income levels tend to determine the type of waste generated, where the share of inorganic materials, including plastics, paper, and aluminum, tends to increase as people grow wealthier and move to cities. Waste flows in rural areas on the other hand are characterized by a high share of organic matter, ranging from 40-85 percent.

Better Waste Management, Circular Economy

About a quarter of the world's garbage is diverted to recycling, composting, or digestion, waste management options that are environmentally superior to landfills and incinerators. In the United States, the recycled share of MSW grew from less than 10 percent in 1980 to 34 percent in 2010, where the grow interest in MSW recovery is driven by a maturation of regulations and of markets for post-consumer materials. According to the report, "The gold standard for MSW will be to integrate it into a materials management approach known as a "circular economy," which involves a series of policies to reduce the use of some materials and to reclaim or recycle most of the rest." Japan is a great example of circular economy where resource productivity and the recycling rate are projected to double by 2015 over 1990 levels and the total material sent to landfills will likely to decrease to about a fifth of the 1990 level by 2015.

Changing Demographics and Waste Volume

While 76 million of baby boomers began to cross the age of 60 around 2005, the trend of increasing retirement began. Their spending habits and consumption will change gradually and shift from spending to saving, thus possibly lead to less waste generation. According to renowned economist Harry S. Dent, we are poised to move into a long period of deflation resulting reduction in the value of goods and services and high unemployment. It is possible that less money to spend results in less consumption and less waste. Aging population and slowed economy could lead to less waste generation. According to a recent report by Waste Watch, there has been a 13% drop in food waste since 2008, where the food purchasing also declined.

Waste Management is still a Big Business

Despite the potential waste generation decline due to demographics shift and slowing economy, waste management is still a long-term business in-demand. The UNEP estimates the global waste management market (from collection through recycling) to be worth more than $400B. The UNEP also estimates that a 3.5x increase in recycling is required in order to "green the waste stream". Investors who are interested in research further into this waste management industry can review the following two companies: Waste Management, Inc. (NYSE:WM) and Republic Services, Inc. (NYSE:RSG)

Waste Management, Inc.

Waste Management Inc. is the largest integrated waste services provider in the U.S., operating 271 active landfills and 294 transfer stations. Waste Management also operates 22 waste-energy plants that produce renewable energy through its Wheelabrator segment. Waste Management's dominance in landfill ownership and its massive scale in collection routes are creating efficient waste streams that funnel volumes to valuable landfill space, which is under strict environmental regulation. Waste Management's core business generates strong cash flow through its collection segment and pricing power at landfills, providing necessary, much needed services to residential, commercial, and industrial customers.

WM currently has an enterprise value of $28.73B with a market cap of $15.70B. WM has a Trailing P/E of 18.22 and a Forward P/E of 14.84 with the PEG ratio of 2.76 (5 year expected). WM generates ROE of 14.00% with a profit margin of 6.31%, ttm. WM has a total cash of 398.00M and operating cash flow of $2.45B with a levered free cash flow of $661.62M. The book value per share is $13.56, mrq. As of December 24, 2012, WM is trading at $33.84. WM currently generates 4.20% annual dividend yield and has a low beta of 0.55.

Republic Services, Inc.

Republic Services, Inc., a Delaware corporation, is the second largest provider of non-hazardous solid waste collection, transfer, recycling and disposal services in the United States, as measured by revenue. RSG manages operations through four geographic regions - Eastern, Midwestern, Southern and Western. The Company operates 343 collection companies, 194 transfer stations, and 191 active solid waste landfills as well as recycling facilities and several landfill gas-to-energy projects.

RSG has an enterprise value of $17.88B and has a market cap of $10.85B. The Trailing P/E for RSG is 17.36 and the Forward P/E is 15.57. The PEG ratio (5 year expected) is 2.58. RSG generates 8.29% ROE and has a profit margin of 7.84%. RSG currently has a total cash of 74.00M, mrq, and an operating cash flow of $1.54B with a levered free cash flow of $451.40M. The book value per share for RSG is $21.23. As of December 24, 2012, RSG is trading at $29.74. RSG currently generates 3.16% annual dividend yield and has a beta of 0.82.

Note: Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WM, RSG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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