Trash to Gas: How our Waste is Making Big Money
Tyler is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sometimes in the world of investing, we can find some of the greatest value in some of the dirtiest places. It is no surprise, then, that waste services are one of the most solid picks in the market.
Companies like Waste Management (NYSE: WM) and Republic Services (NYSE: RSG) are in some ways the most surefire picks you can make. They have a built-in customer base that is going nowhere, they have low production costs, and there does not appear to be any major revolutions to waste services in the near future. These well entrenched companies also reward their investors with a healthy dividend (4.1% and 3.3% yields for Waste Management and Republic Services, respectively). These are the types of companies Peter Lynch dreams about.
So, perhaps you are not completely convinced. Perhaps you are thinking “Where is the growth coming from?” To some degree, you have a point. The waste services industry is pretty well saturated. It is hard to find a household, company, or public institution that isn’t having its refuse put into a landfill or recycling center. Some would argue that with so many of these waste sources now turning to recycling or composting, the overall amount of refuse per capita is decreasing. So how can a company like one of these grow without acquiring one of its competitors? Simple, it starts tapping into one of its most underutilized resources: gas. Natural Gas.
Of all that trash we put into a landfill, a large portion of it is organic waste (i.e., food scraps). As these things break down in the landfill they produce methane gas. While this is not a new thing (methanogenesis has been happening since bacteria existed), it only took one smart person in the executive suite for one of these companies to realize they were sitting on a viable energy factory.
Today, Waste Management and Republic Services are responsible for the production of nearly 800 Megawatts of electricity -- considerably more than all solar power production in the United States. More importantly, they are seeing the growth results one would expect from an emerging market like natural gas. Waste Management has over 30 public Compressed Natural Gas fueling (CNG) stations throughout North America, and plans to have another 20 operational by the end of 2012. Waste Management is one of the first companies to put great effort into developing CNG and Liquid Natural Gas (LNG) refueling stations available for public use. This could be a very smart play as more and more engines on the road are using natural gas.
Not only does this provide a little padding to the revenue stream, it also provides some relief for the bottom line. With a little help from the innovations by those other investor darlings, Westport (NASDAQ: WPRT)-Cummins (NYSE: CMI), both Waste Management and Republic Services have made big plans to convert their fleets from diesel to natural gas engines. With diesel prices nearing their 2008 highs of over $4.00 a gallon and the gas-gallon equivalent at around $2.00, the conversion alone would be a 50% slash in fuel costs. Combined, they have fleets of nearly 2,700 natural gas collection trucks, with plans for 80% of new truck purchases to have natural gas engines.
Add this all up and it doesn’t even seem right to call this sitting on a pile of gold. It’s even better.
TylerCrowe owns shares of Westport Innovations. The Motley Fool owns shares of Waste Management and Westport Innovations. Motley Fool newsletter services recommend Cummins, Republic Services, Waste Management, and Westport Innovations. 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. If you have questions about this post or the Fool’s blog network, click here for information.