Garbage Collection Lacks Mob Profits

• ByDavid MacDougall, TSC Ratings Analyst
• On 8:36 am EST, Monday November 2, 2009

BOSTON (TheStreet) -- When some people hear the profession "waste management," they think of Tony Soprano.

The fictional mob boss of HBO's "The Sopranos" portrayed himself as a waste-management consultant in polite society. In reality, the industry is more progressive and "green" than the gritty images of northern New Jersey from the series would suggest.

Major players include Republic Services and Stericycle, but the biggest name is the one you probably see stamped on garbage trucks. Houston-based Waste Management has more than $10 billion in annual revenue, generated from collection and landfill services to recycling and waste-to-energy-electricity generation.

Waste-management companies are on the front lines of greening up the country. The dumping and recycling of garbage is crucial to environmental efforts. Those pushing for change have their eyes on Waste Management, Republic Services and Stericycle.

Stericycle deals mainly with medical waste, which potentially can pollute more than household garbage. While the handling of such dangerous material is profitable, the downside of Stericycle's responsibility is above-average risk. A slip in best practices could lead to a costly cleanup or a lawsuit in the worst cases. Although such circumstances are an exception rather than the rule, it's a consideration that can erode profitability in the long run.

Waste Management touts its commitment to recycling and waste-to-energy production, even as those segments contribute only 5.7% and 6% of revenue, respectively. The main driver of revenue is collection -- the hauling away of garbage in its green-colored trucks. That should be investors' main concern. Total collection weight is the gold ring, so getting sidetracked by recycling or other services is akin to being blinded by fancy footwork.

Waste Management remains the biggest collector, but Republic Services is quickly making up ground with much faster revenue growth, fueled by trash-hauling services. As a result, Republic Services' shares have risen 11.3% over the past year, keeping pace with the S&P 500 Index's 12% increase. Waste Management and Stericycle have lagged behind, with declines of 2.1% and 6.8%, respectively.

Even though trash collection is a crucial service -- even more so than the often-cited cable TV -- the three companies' stocks don't seem like a good investment at this time. Only Waste Management is at an attractive price-to-earnings ratio of 15.3 versus the industry average of 25.3. Republic Services is at 17.8, and Stericycle is 25.5.

None of the companies are risky from a financial position. They each have a moderate amount of debt and decent margins, but they aren't exactly minting money either. Waste Management and Stericycle beat analysts' earnings estimates for the most recent quarter last week, and Republic Services has yet to release results. If the waste-management industry piques your appetite, look for Republic Services as the best bet of the three because of faster growth.

As the economic turnaround picks up, there will be plenty of interesting plays based on environmentalism that will likely outperform these waste-management picks. None of the stocks are bad choices, but it would probably be wise to avoid them in search of greener pastures.

-- Reported by David MacDougall in Boston.

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