Follow Bill Gates Into This Waste Collection Stock

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The provider of non-hazardous solid waste collection Republic Services (NYSE: RSG) was bought continuously by one of its big shareholders, Cascade Investment, which is controlled by billionaire Bill Gates. In November, Cascade Investment purchased nearly 11.6 million shares of the company at around $26.62 - $26.87 per share, with the total transaction worth around $310.6 million. Currently, Cascade Investment owned more than 89 million shares of the company. Should an investor follow Bill Gates in owning this waste management company?

Business Snapshot

Republic Services is the second biggest non-hazardous solid waste collection service provider, with 334 collection operations in 39 states in the US and Puerto Rico. The collection segment brought the majority of its revenue, of nearly $6.2 billion out of $8.2 billion in total. In the collection segment, its revenue has been spread quite similarly in three sub-segments including residential, commercial and industrial. In 2011, the commercial sub-segment was the largest among the three, accounting for 30.4% of total revenue, whereas the residential sub-segment and industrial represented 26.1% and 18.5%, respectively. In order to perform collection services, the biggest expense for the operation was labor and related benefits, of $1.53 billion in 2011, accounting for 18.7% of the revenue. Then it came to transfer and disposal costs (7.8%) and maintenance and repairs (7.7%). Over the last 3 years, total operating costs were around 58.8% - 59.4% of the total revenue. It is good that the company does not have customer concentration, as no individual customers accounted for more than 3% of consolidated revenue in the last 3 years.

Cash Generation With Decent Leverage

After Republic Services and Allied Waste completed its merger to form a second larger player in the waste industry with revenue of more than $8 billion, the company has still been a cash generator. It has generated consistent growth in its profits and cash flow. Republic Services has grown EPS from $1.30 in 2009 to $1.56 in 2011, whereas operating cash flow has increased from $1.4 billion to $1.76 billion in the same period. The free cash flow has also been on the rise, from $570 million to $830 million. Since then, Republic Services has kept the payout ratio less than 60% on increasing dividends. Trailing twelve months, the dividend was around $0.90 per share.  

Republic Services employs decent leverage. As of September, it had nearly $7.74 billion in total stockholders’ equity, only $74 million in cash, and $7 billion in long-term debt. Notably, the amount of goodwill was a whopping amount of nearly $10.68 billion. The high amount of goodwill resulted from the merger with Allied Waste. It also had deferred tax liabilities (interest-free loan from the government) of $1.16 billion.

Cheapest Valuation With Lowest ROIC

Among the peers, including Waste Connection (NYSE: WCN) and Waste Management (NYSE: WM), Republic Services has the cheapest valuation.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>RSG</strong></p> </td> <td> <p><strong>WCN</strong></p> </td> <td> <p><strong>WM</strong></p> </td> </tr> <tr> <td> <p><strong>Net margin (%)</strong></p> </td> <td> <p>7.83</p> </td> <td> <p>10.11</p> </td> <td> <p>6.31</p> </td> </tr> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>4.31</p> </td> <td> <p>5.94</p> </td> <td> <p>5.4</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>0.9</p> </td> <td> <p>0.5</p> </td> <td> <p>1.5</p> </td> </tr> <tr> <td> <p><strong>EV/EBITDA</strong></p> </td> <td> <p>7.6</p> </td> <td> <p>9.9</p> </td> <td> <p>8.65</p> </td> </tr> <tr> <td> <p><strong><span><span>Div</span></span> Yield (%)</strong></p> </td> <td> <p>3</p> </td> <td> <p>1.1</p> </td> <td> <p>4.2</p> </td> </tr> </tbody> </table>

Republic Services is valued only at 7.6x EV/EBITDA, whereas Waste Connection and Waste Management are valued at 9.9x and 8.65x EV multiples, respectively. However, Republic Services is also the least profitable among the three. Trailing twelve months, with ROIC of only 4.31%, whereas the other two had a slightly higher return on invested capital. If investors are chasing for high yields, then Waste Management could be an option, paying highest dividend yield of 4.2%. Republic Services is also the second option, with a bit lower yield of 3%.

Foolish Bottom Line

Waste collection and management companies seem to be a good option for investors to park their money for dividends, as they seem to generate consistent positive cash flow. In addition, they also offered nice dividend yields to shareholders. With the decent leverage, attractive yields, and the lowest EV multiples among its peers, Republic Services could be a good long-term buy for shareholders.


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Waste Management. Motley Fool newsletter services recommend Republic Services and Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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