Using a growth by acquisition strategy doesn’t always lead to a profitable outcome, but we share an instance where it worked among waste management stocks.

Growth by acquisition is a strategy used by companies to grow via buying other companies. Growing by acquisitions is an inherently risky strategy. The best companies cut the risk by only making takeovers that help expand their core business. They are also willing to walk away from a purchase if the price is too high.

Today we are looking at a company among waste management stocks that has taken a growth by acquisition approach and is a stock that’s okay to hold.

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Republic Services Inc., symbol RSG on New York, is okay to hold among waste management stocks

Republic Services Inc. is a leading U.S. waste management business. 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. Bill Gates, through his investment vehicle Cascade Investment, owns more than 34% of its stock.

On May 2, 2022, Republic completed the acquisition of US Ecology Inc. (symbol ECOL on Nasdaq) for $2.2 billion.

In the 12 months ended September 30, 2021, US Ecology reported $968 million in revenue from 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 has almost $1 billion in revenue. It’s the largest hazardous waste landfill operator by volume in the U.S. In addition, its operations team has the technical expertise needed to accelerate Republic’s growth in this area.

Republic’s revenue has increased 12.5% over the last five years, from $10.0 billion in 2017 to $11.3 billion in 2021. Excluding one-time items, earnings rose 61.8% as the company moved into more profitable markets, from $822.2 million, or $2.43 a share, in 2017, to $1.33 billion, or $4.17 a share, in 2021.

Meanwhile, in the quarter ended March 31, 2022, Republic’s revenue increased 14.4%, to $2.97 billion from $2.60 billion a year earlier. Revenues rose in all its operating segments. Excluding one-time items, the company’s earnings in the latest quarter were $360.7 million, or $1.14 a share. That was up 21.4% from $297.2 million, or $0.93.

Growth by acquisition adds risks, especially with acquisitions as big as US Ecology. Republic aims to offset some of that risk by buying related firms it believes it can integrate smoothly to generate cost savings. Still, the company has a 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 27.0 times forecast 2022 earnings of $4.70 a share. The shares yield 1.5%. Republic Services is okay to hold.

Using a growth by acquisition strategy may work for some waste management stocks, like Republic Services mentioned above, but it does not work out in all instances

A growth by acquisition strategy is inherently risky. It’s a little like buying new stock issues.

These acquisitions generally come on the market when it’s a good time to sell. That may not be, and often isn’t, a good time to buy. Insiders and managers at the selling company know a lot more than the buyers about the company itself, and its business strengths and weaknesses.

Some takeovers work out well for the buyers, of course. This doesn’t diminish the inherent risk. More importantly, risk multiplies as takeovers become a habit.

Takeovers are more likely to succeed when the buyer is already a successful company and is under no pressure to buy anything. That way, the buyer can take its time and wait for a truly attractive, low-risk opportunity to come along.

The lesson here is that major, successful, well-managed companies do succeed in growth by acquisitions. But they use them as a tool for pursuing a core business, rather than making acquisitions the core of their business.

A growth by acquisition strategy isn’t foolproof, even the best managed companies stumble, and fail. The best companies are willing to get out, even at a loss, when they see an exit as the smart thing to do.

That’s one more reason why, in our publications and portfolio management service, we focus on high-quality, well-established companies. They make fewer takeover blunders. When they do make mistakes, they tend to recognize them earlier, and cut their losses before they reach catastrophic levels.

Use our three-part Successful Investor approach for all of your investments, including waste management stocks

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

What is your experience investing in stocks of companies that use a growth by acquisition strategy?

Do you hold any RSG stocks in your portfolio? How has its history of acquisitions impacted the performance?