Why The Waste Industry Is Different And Not Ripe For Disruption

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Includes: RSG, WCN, WM
by: Muhammad Zakaria

Summary

Certain startups in the waste management industry have claimed that the industry is behind the times, poorly managed and (by implication) a bad investment with an uncertain future.

The notion that the industry is in need of disruption is disproved by both its leading companies' performance and their considerable and continuing investment in innovation and infrastructure.

Business fundamentals for Waste Management, Republic Services, and Waste Connections are strong, and their stocks have dramatically outperformed the S&P 500 over the past five years.

Is America's waste management industry in need of disruption? Some may say that trash -- yes, trash -- is the next taxi industry (see UBER) or maybe the next hospitality industry (see AIRB). The primary arguments in favor of a disruption of the waste management industry follow a script that should sound familiar to anyone who has followed recent disruptors, both successful (Uber, Airbnb) and not so successful (Theranos, Juicero): "[insert industry] is stodgy, calcified and oblivious to the benefits provided by our brave new world of technological omnipresence, and our [app/service/product] will not only revolutionize the industry but change the world."

While this might be an appealing notion, the facts make clear that not only does the waste management industry bear hardly any resemblance to taxis or hotels (or medical testing or cold-pressed juice), but that the industry itself has for years been rethinking waste and recycling handling, increasing efficiency and investing heavily in innovation. It remains an attractive investment for those interested in companies with steady growth and responsible management.

It is helpful to consider the basics. Waste disposal and recycling companies operate in an approximately $75 billion market in the U.S. According to the CEO of the National Waste and Recycling Association, the industry disposes of roughly 260 million tons of waste per year (or 4.4 pounds of waste for every American, every day), with 34% of this being recycled and composted.

Another key difference between waste management and -- to continue the comparison -- taxis and hotels is infrastructure. That is, plenty of people have cars with empty seats and houses or apartments with empty rooms. There aren't many folks out there with waste collection trucks sitting idle or waste disposal facilities in need of a mobile app to pad their incomes. The need for a robust, well-thought-out infrastructure that complies with all state and federal regulation, from curbside to final destination, is critical to the efficient and profitable operation of waste management -- a fact often taken for granted by the general public.

Despite these differences, the industry has recently seen a handful of startups attempt to "disrupt" waste management; these companies argue that he industry has failed to adapt to technological progress and is indifferent to the environmental concerns associated with waste management. Rubicon Global, an Atlanta-based company, has stirred up considerable media interest in recent years by touting their efforts to disrupt the industry using mobile technology and data collection. Rubicon has said their app (which is, at its core, an online waste broker service) and associated data collection technology will revolutionize the trash industry, save money and -- by somehow "eliminating" landfills -- change the world. (Sound familiar?) Another startup, Recycle Track Systems, is pursuing a similar model, using an app with "smart routing software" to schedule on-demand pickups, power data analytics and "revolutionize" the waste and recycling industry.

In fact, the existing industry leaders -- including Waste Management (WM), Republic Services (RSG) and Waste Connections (WCN) -- have amassed an impressive record on sustainability and innovation, making a successful attack from those angles unlikely to succeed. Today's largest firms have introduced innovations such as single-stream recycling, where customers can dump all recyclables in one bin. They are growing recycling capability faster than that of landfills.

The industry leaders use their landfills for clean, renewable energy projects, including landfill-gas-to-energy and solar. In contrast to many of the independent collectors, the waste disposal trucks of the industry's largest companies increasingly run on compressed natural gas-cleaner and are quieter than diesel. And they travel on highly efficient routes for trash pickups scheduled by mobile apps and logistics software, according to the National Waste and Recycling Association.

The stock market is certainly not buying any talk of disruption. The waste management industry has never been stronger. It has been hard not to notice the bull market in U.S. equities -- for example, the S&P 500 is up 77.7% over the past five years. This, however, pales in comparison to the performance of the "big three" in the industry -- WM, RSG and WCN -- which are up 115.1%, 123.8% and 135.6%, respectively, over the same time period.

Furthermore, despite this impressive track record, the Street continues to underestimate the industry leaders. Over the past four quarters, the big three have met or exceeded analysts' earnings estimates 92% of the time. Analysts do agree on the overall attractiveness of these stocks. Analyst consensus on RSG is "overweight," with no sell recommendations and increasing buy recommendations over time. RSG has gone from strength to strength, delivering a shareholder return of approximately 33% in 2016, nearly triple the S&P 500 average. In the second quarter of 2017, it grew revenue by 7.5%, its highest in over eight years.

The industry remains in an enviable position -- the CEO of WM recently cited margins of 30% -- and with its focus on and investments toward the future, as well as its leadership on increasingly important green issues, should be a solid investment for the foreseeable future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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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