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Here's Why You Should Retain Republic Services (RSG) for Now

Zacks Equity Research

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 on by tough market conditions.

One such stock is Republic Services, Inc. RSG, which has an expected long-term (three to five years) earnings per share growth rate of 9.9%. Moreover, earnings are expected to register 15.2% growth for 2021. 

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 its contracted revenue base, thereby strengthening its market position. Further, the company continues to look out for strategic price increases in order to offset escalated costs, improve operating margins and enjoy an appropriate return on its substantial investments in vehicles, equipment, landfills, transfer stations and recycling centers. Increasing demand for the recycling of waste products is another major positive for Republic Services.  Notably, revenues included a 1.8% positive impact of internal growth during 2019.

The company 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 reduce costs and improve profitability. The company is also focused on enhancing operations by streamlining the cost structure, improving revenue quality and seeking growth through profitable investment opportunities. In 2019, almost 13% of the replacement vehicle purchases were CNG vehicles. Meanwhile, the company is highly optimistic about the usage of CNG vehicles, which will help it compete effectively on grounds of maintaining a clean environment. Despite higher expenses, CNG reduces the company’s overall fleet operating costs through lower fuel expenses. As of Dec 31, 2019, Republic Services operated 39 CNG fueling stations. All these factors offer a solid investment proposition for the company.

Consistent efforts in rewarding shareholders through dividend payments and share repurchases not only instill investors’ confidence but also positively impact earnings per share. In 2019, 2018 and 2017, the company paid out $491.2 million, $461.8 million and $440.5 million in dividends and repurchased shares worth $399.4 million, $736.9 million and $610.7 million, respectively.

Risks

Despite the aforementioned positives, the company faces its share of headwinds. Republic Services’ balance sheet is highly leveraged. As of Dec 31, 2019, long-term debt (net of current maturities) was $7.76 billion while cash and cash equivalents were $47.1 million. High debt may limit the company’s future expansion and worsen its risk profile.

The company’s revenues are highly seasonal in nature, with lower revenues in the fourth and first quarters compared to that in the second and third quarters. Price increases and profitability expansion become difficult in a highly competitive solid waste industry.

Zacks Rank & Stocks to Consider

Currently, Republic Services carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader Zacks Business Services sector are CoreLogic CLGX, GreenSky GSKY and Huron Consulting HURN, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term expected EPS (three to five years) growth rate for CoreLogic, GreenSky and Huron Consulting is 11%, 12.9% and 13.5%, respectively.

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