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Republic Services (RSG) Rides on Internal Growth, Debt High

Zacks Equity Research

So far this year, shares of Republic Services, Inc. RSG have gained 16.7% compared with 20.8% rise of the industry it belongs to and 14.4% rise of the Zacks S&P 500 composite.

The company has witnessed a 29.3% rise in share price since it posted mixed first-quarter 2019 results.

The company reported first-quarter 2019 adjusted earnings per share of 73 cents, which outpaced the consensus mark by a penny but were marginally lower than the year-ago quarter. Revenues of $2.47 billion lagged the consensus estimate by $19.9 million but increased 1.8% year over year.

Republic Services has an impressive earnings surprise history, having outpaced estimates in three of the trailing four quarters. It delivered average four-quarter beat of 1.3%.

What’s 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. Notably, in first-quarter 2019, revenue growth included a positive impact of 1.3% internal growth. Increasing demand for the recycling of waste products is another major positive for the company.

Furthermore, the company focuses on improving operational efficiency by shifting to compressed natural gas (CNG) collection vehicles and converting rear-loading trucks to automated-side loaders, which reduce cost and improve profitability. In 2018, almost 13% of the replacement vehicle purchases were CNG vehicles.

We are impressed with Republic Services’ consistent efforts to reward its shareholders through dividend payments and share repurchases. In first-quarter 2019, Republic Services paid $121.0 million in dividend payments and repurchased 1.5 million shares for $111.5 million. In 2018, the company paid $461.8 million in dividends and repurchased shares worth $736.9 million. Such moves indicate the company’s commitment to create value for shareholders and underline its confidence in its business.

Risks

Republic Services has a highly leveraged balance sheet. As of Mar 31, 2019, long-term debt (net of current maturities) was $6.80 billion while cash and cash equivalents were $68 million. Such a cash position implies that the company needs to generate adequate amount of operating cash flow to service its debt. Also, high debt may limit the company’s future expansion and worsen its risk profile.

The company continues to face weak landfill pricing due to high cost of landfills and leachate. This limits the company’s ability to increase prices, which is necessary to cope up with higher costs, improve operating margins and make necessary investments. This inability is likely to weigh on the company’s margins and earnings going forward.

Zacks Rank & Stocks to Consider

Republic Services currently carries a Zacks Rank #3 (Hold). 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 WEX WEX, Navigant Consulting NCI and FLEETCOR Technologies FLT. While WEX and Navigant Consulting sport a Zacks Rank #1, FLEETCOR carries a Zacks Rank #2 (Buy).

Long-term expected EPS (three to five years) growth rate for WEX, Navigant Consulting and FLEETCOR is 15%, 13.5% and 16.5%, respectively.

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