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Waste Management Stocks Have Investors Cleaning Up

- By Adam Lawrence

Really take a look at the historic charts of some of the biggest companies in the market right now. What sectors come to mind? Tech, biotechnology and maybe online retail are some that you think about, but did you consider garbage? Come to find out, waste management has become one of the biggest businesses on the planet and is projected to grow to over $1.4 trillion in annual revenue by 2019.


Of course, there are municipal services and private sector organizations, but some of the largest companies within the arena are publicly traded. A look at some of the chart patterns has not only raised my eyebrows, but many investors as well.

Take for instance, Waste Management Inc. (WM), the largest public waste management company. It did roughly $13 billion in revenue last year and continues to expand on its collection and landfill operations. Nearly all of its revenue came from these two areas alone.

Year over year, the company increased revenue from collection operations by 4.3%. It also saw a 6.5% increase in revenues from landfill operations compared to 2015. Although these figures are positive on an annual basis, they are still down from the near $14 billion the company did in 2014.

Since last March, the stock has increased from lows of $55.11 to as high as $73.20 as of the morning of Feb.21.

Similarly, Republic Services (RSG) recorded 88% of its over $9 billion in annual revenue from just collection and landfill services. The company cleaned up with a 4% increase in year-over-year fourth-quarter revenue, and its adjusted EPS went from 50 cents to 57 cents, a 14% change from the fourth quarter of 2015.

In a statement, Republic Services CEO Donald W. Slager explained his stance on continued growth for the company into 2017.

"We finished the year strong and delivered fourth-quarter and full-year results that exceeded the upper end of our guidance," Slager said. "Our positive momentum continued throughout 2016, which resulted in full-year margin expansion, high-single-digit earnings and free cash flow growth, and improved return on invested capital. Our solid results continue to reflect positive contributions from reinvesting back into the business and successfully executing our strategy of profitable growth through differentiation."

Further guidance on 2017's operations also has the company slated for revenue growth of 4.5% to 5% in addition to expanding its margins by 20 to 40 basis points to a range of 28.5% to 28.7%. The direction the company has taken seems to be resonating with investors as the stock is up nearly 36% since last March.

When you consider the market has been considerably bullish overall, stocks in this sector have been able to outperform the S&P 500 during the same time frame. Look at the SPDR S&P 500 ETF (SPY). Alhough it has seen roughly a 25% bump since last March, it still pales in comparison to stocks in this sector.

But it is not just about trying to do the same things big companies like Waste Management and Republic Services are doing, with the hopes of grabbing a piece of the market share. Other companies like BioHiTech Global (BHTG) are looking to reinvent what it means to dispose of organic waste. The company specializes in a "tech meets waste management" scenario.

Its flagship Eco-Safe Digester actually uses aerobic digestion technology to knock out food waste at its origin. This technology utilizes microorganisms and oxygen to safely and quickly break down food waste. It then discharges it to a standard sewer line. The system is also directly connected to the company's BioHiTech Cloud. This collects real-time operational data from the Eco-Safe Digester, giving clients the ability to remotely analyze and react to certain changes.

Essentially, BioHiTech has the ability to replace a dumpster in the back of a restaurant and substitute its digester system to break down things like meat, fish, bakery goods, dairy products and a myriad of other items.

Similar to Republic Services and Waste Management, BioHiTech has also realized annual revenue growth. For the nine months ended Sept. 30, 2016, the company recorded an increase of 63.8% compared to the same period in 2015. Gross margins also jumped from 9.6% in 2015 to 25.7% for the same period in 2016. This growth was a result of a dramatic increases in both equipment sales (up 293.7%) and rentals (up 37.2%). A recent series of announcements revealed the company's inclusion of new leadership from people like former Wal-Mart (WMT) Senior Vice President Anthony Fuller.

In addition to the aforementioned waste management stocks, Waste Connections Inc. (WCN) has also followed a growth pattern and recently hit new 52-week highs of $84.34 as of Feb. 21. They, along with BioHiTech, will be presenting at the upcoming Waste and Environmental Services Symposium hosted by Gabelli & Company.The company released earnings after the market closed on Feb. 21. Expectations were high from several street analysts, including Zacks Equity Research.

"Waste Connections outperformed the Zacks categorized Waste Removal Services industry with an average return of 7.5%, compared with 7% for the latter, over of the last three months. With prime location of disposal sites within competitive markets, Waste Connections has optimal asset positioning to generate higher profitability."

Leading into the next corporate filings, Waste Connections' nine months ended Sept. 30, 2016, showed a favorable increase in both revenue and margin of operating income on a year-over-year basis between 2015 and 2016. Revenue jumped from $1.59 billion to $2.33 billion and operating income went from a deficit of $163 million to a surplus of $313 million. Increased margins were aided by the company's decrease in "impairments and other operating items," which went from $494 million for the nine-month period in 2015 to less than $4.7 million in 2016.

Conclusion

It would appear the waste management industry could be set to continue seeing growth as the market is anticipating it to be valued at over $1.4 trillion in the very near future. Consideration of the actions taken by the Trump administration for things like deregulation of certain sectors does not seem to have made this market waiver in the least.

Furthermore, many companies involved have demonstrated consistent growth year over year, and with no shortage of humans contributing to the creation of waste, it would seem this sector would be positioned to benefit from the growing global population. Further innovation has also built interest as more "green" alternatives to simple garbage management could be creating a new niche to waste management.

Disclaimer: The author owns zero shares in any companies mentioned within this article. The author is affiliated with Midam Ventures LLC a company which has an exisiting marketing & awareness contract with a non-affiliate third party Woodgrove Enterprise to provide marketing & awareness for BioHiTech Global (BHTG). The author has not been compensated to write this article.

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This article first appeared on GuruFocus.