A Member of Pat McKeough’s Inner Circle recently asked for his advice on Republic Services, a waste management company operating across residential, commercial and industrial markets in North America.
Pat likes the company’s consistent track record of growing revenues and earnings as well as its leading market share in multiple regions. However, he notes the company is growing mainly by acquisition which can carry additional risks over purely organic growth.
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Republic Services Inc. (Symbol RSG on New York; www.republicservices.com), is a U.S. waste management company. It is the largest or second-largest waste management business in 95% of the markets where it operates.
The company has spent over $5 billion on acquisitions in the past five years or so. Bill Gates, through his investment vehicle Cascade Investment, owns more than 34% of its stock.
In May 2022, Republic completed the acquisition of US Ecology Inc. (symbol ECOL on Nasdaq) for $2.2 billion.
US Ecology added nine specialty waste landfills (five of which are hazardous waste landfills); 16 transfer, storage, and disposal facilities; seven wastewater treatment facilities; and more than 80 environmental service field locations.
US Ecology had almost $1 billion in revenue. It was the largest hazardous waste landfill operator by volume in the U.S. In addition, its operations team has the technical expertise to accelerate Republic’s growth in this area.
Republic’s revenue has increased 49.6% over the last six years, from $10.0 billion in 2018 to $14.96 billion in 2023. Excluding one-time items, earnings rose 54.0%, from $1.01 billion, or $3.09 a share, in 2018, to $1.56 billion, or $4.93, in 2022. Those gains come from the company’s move into more profitable markets. In 2023, earnings rose a further 13.6%, to $1.78 billion, or $5.61 a share.
Inner Circle: Revenues and earnings up strongly in the most recent quarter for Republic Services
In the three months ended December 31, 2023, Republic’s earnings per share, excluding non-recurring items, rose 24.8%, to $1.41 from $1.13. That beat the consensus estimate of $1.28. The company’s revenues rose 8.6%, to $3.8 billion from $3.5 billion.
While encouraging, growth by acquisition adds risk, especially with purchases as big as US Ecology—although Republic aims to offset some of that risk by buying related firms that it believes can be smoothly integrated to generate cost savings. In addition, the company already has leading market share in most of its geographic locations, so it will need to keep making acquisitions to show significant growth.
The stock is now close to all-time highs and is trading at 30.7 times forecast 2024 earnings. The shares yield 1.2%.
Recommendation in Pat’s Inner Circle: Republic Services is a hold.
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