There is an old saying that the only things in life that are certain are death and taxes, but the need for people to manage their trash falls a close third.
Many investors use this fact to their advantage by choosing waste collection stocks in their portfolios. While the decision to invest in trash is not right for everyone, it is something to consider.
Pros and Cons of Investing in Waste Collection Stocks
Waste collection stocks are still growing. “The fundamentals of solid waste haven’t peaked,” writes The Street, “even though recycled commodity prices have hit new 10-year lows. The reason is simple – as the population grows, the amount of trash those people generate also rises.”
“When a landfill closes, you can’t necessarily find an adjacent piece of property,” explains Jim Fish, CEO of Waste Management (WM). “You have go to either develop a new technology, which we are really looking worldwide for than just lining a landfill and putting waste in there and collecting gas.”
Waste Management [NYSE: WM] in particular has around 50 years to come up with the answer per its own estimates, but that time is going to go by pretty quickly and sometimes estimates are wrong.
Before you invest in a waste collection stock, know what you are getting.
Is Waste Management Stock a Buy?
The company also has 314 transfer stations that collect and compact waste before it reaches those landfills. Waste Management uses some of that waste to create electricity and recovering naturally-produced gas as everything decomposes.
Its efforts make the company one of the biggest recyclers in North America.
The purchase came with a $4.9 billion enterprise value, but the benefits are significant. The various synergies afforded by the acquisition are expected to produce over $100 million in cost savings while expanding WM’s customer base.
Plus, Waste Management does not expect the transaction to impact its operations very much. According to its press release announcing the deal, the company “expects to achieve targeted leverage and return to normal run-rate share repurchases within one year of the acquisition’s close.”
That said, investing in Waste Management does come with risks.
The industry is very competitive. If the company were to be underbid, it could lose customers.
In addition, a new company could rise up, either organically or through a competitor acquiring size, and provide something that Waste Management cannot.
Further, the company is subject to many environmental regulations. As these government standards become stricter, meeting those demands may erode WM’s bottom line.
Commodity prices also weigh on the company’s operations.
The sale of recyclables and the ability to export those items are a central part of the was that WM does business. For instance, the company takes all the old cardboard and newsprint then recycles it and ships those materials to places around the world.
Its biggest customer for this paper product is China. Since 2013, the country has been steadily adding regulations and limits. Now, the tariff issue is posing an additional threat to this market.
Customer preference is an issue as well. Many people are becoming anti-landfill.
They are reducing what they consume, composting certain waste, avoiding plastics waste (e.g., market bags, plastic straws) and recycling what they cannot reuse.
Many corporations are getting in on the trend too with zero-waste policies. All of this impacts Waste Management’s business.
At the same time, technology is an issue. If a competitor developed a better way to dispose of waste, these newly landfill-conscious consumers, from governments to individuals, may actively choose to move away from WM and patron that provider.
Should You Invest in Republic Services Stock?
Republic Services [NYSE: RSG] is the second largest provider of waste collection services in the United States. It has 190 landfills and 207 transfer stations, but that figure could change.
Republic Services is actively working on growing through acquisition. It devotes around $200 million per year to buy up smaller, privately held companies that complement its business, but considers larger ones too, when the opportunity is right.
Republic Services [NYSE: RSG] is also looking at strategic partnerships as a way to reduce certain expenses, like truck routing, maintenance, or back office operations.
The company is focusing on reducing its costs in other ways as well. It has already converted 75% of its residential routes to automated trucks with a single driver and it is working on converting the fuel source of its fleets to compressed natural gas (CNG).
Republic Services experiences many of the same risk factors as Waste Management.
The industry is very competitive, and pricing is always an issue. Set a low cost and you might not be able to maintain a reasonable profit while complying with government regulations but go too high and you could be underbid by a competitor.
Fuels costs also come into play – hence RSG’s investment in fuel conversion – then, there are the market trends towards zero-waste and the issue of tariffs (Republic Services sells a recycled paper product to China too).
Where Republic Services [NYSE: RSG] stands apart from Waste Management is in its debt.
The company owed around $8.4 billion as of the end of the 2018 fiscal year – which is four times as much as Waste Management did at the end of 2018.
That amount is significant, and the company is still investing in growth. If Republic Services isn’t careful, it could see its credit rating go down and subsequently reduce its opportunities to attract additional funding.
Waste Management vs Republic Services Stock: The Bottom Line
While neither one is going to help you get a big return over the short-term, Republic Services could be viewed as the riskier buy.
Right now, Republic Services has a 52-week range of $67.48 to $87.49. Analysts expect that, in one year from now, the stock will be priced at $86.63. It also pays a 1.50 dividend (1.77%).
In contrast, Waste Management has a 52-week range of $79.96 to $115.42. It pays a 2.05 (1.87%) dividend and consensus estimates put the company’s one-year target estimate at $116.09.