A prudent investment decision involves buying stocks that have solid prospects and selling those that carry risks. At times, it is rational to hold certain stocks that have enough potential but are weighed down by tough market conditions.
One such stock is Republic Services, Inc. RSG, which has gained 14.6% in the past year, outperforming the 11.6% gain of the industry it belongs to and 1.7% rise of the Zacks S&P 500 composite.
It has an expected long-term (three to five years) earnings per share growth rate of 8.8%. Moreover, earnings are expected to register 5.2% growth in 2019 and 10.5% in 2020.
However, the company faces its share of headwinds. Republic Services continues to face weak landfill pricing due to high cost of landfills and leachate. High debt may limit the company’s future expansion and worsen its risk profile. Price increase and profitability expansion becomes difficult while operating in a highly competitive solid waste industry. Despite these headwinds, we believe that the company has enough positives that justify retention in investors’ portfolio.
Factors Driving Republic Services
Republic Services continues to grow internally with the help of long-term contracts for the collection, recycling and disposal of solid waste materials. Such agreements increase the company’s contracted revenue base, thereby strengthening its market position.
The company continues to look out for strategic price increase in order to offset increased costs, improve operating margins and enjoy an appropriate return on its substantial investments in vehicles, equipment, landfills, transfer stations and recycling centers. The company’s business stands to benefit from increasing demand for recycling of waste products. Notably, 2018 revenues were driven by 2.5% internal growth.
Republic Services is focused on increasing its operational efficiency by shifting to compressed natural gas (CNG) collection vehicles and converting rear-loading trucks to automated-side loaders, which will streamline the cost structure, improve revenue quality and enhance growth through profitable investment opportunities. In 2018, almost 20% of the company’s fleet operated on natural gas and nearly 75% of its residential routes were converted to automated single-driver trucks.
Meanwhile, the company is highly optimistic about the usage of CNG vehicles, which will help it maintain a clean environment. In 2018, almost 13% of the replacement vehicle purchases were CNG vehicles. As of Dec 31, 2018, Republic Services operated 37 CNG fueling stations.
Zacks Rank & Stocks to Consider
Currently, Republic Services is a Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the broader Zacks Business Services sector are Omnicom OMC, Paychex PAYX and Automatic Data Processing ADP, each carrying a Zacks Rank #2 (Buy). Long-term expected EPS (three to five years) growth rate for Omnicom, Paychex and Automatic Data Processing is 6.9%, 8.8% and 12.8%, respectively.
Zacks' Top 10 Stocks for 2019
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Omnicom Group Inc. (OMC) : Free Stock Analysis Report
Automatic Data Processing, Inc. (ADP) : Free Stock Analysis Report
Paychex, Inc. (PAYX) : Free Stock Analysis Report
Republic Services, Inc. (RSG) : Free Stock Analysis Report
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