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Talking Trash

Republic Services’ acquisition of Allied Waste provides investors with an opportunity too good to pass up, Cramer said Wednesday.

The newly combined company – as long as the deal closes as expected in the fourth quarter – will be number two in the industry behind Waste Management. Together Waste Management and Republic Services will control 60% of the market, creating a strong duopoly with the power to raise prices.

Garbage disposal already has some pretty high barriers to entry, but there are other reasons the new Republic will be ahead of the competition. The company already has top-notch management, and the Allied Waste buy added a lot of valuable facilities to Republic’s portfolio. (More facilities means less travel time to dump garbage which translate to lower fuel costs, etc., and better margins.)

Then there’s the cost savings -- $100 million expected the first year and $50 million of the two years after that. This alone should add another 13% worth of growth to Republic.

Admittedly, Republic has sizable debt. $8.2 billion. But the company plans to pay down $2 billion in the next three years, resulting in interest savings that weren’t accounted for when guidance was offered with the merger announcement.

A little Cramer calculus – 18% long-term growth rate, low earnings estimates of $2.22 for 2009 and an 18 multiple – puts RSG at $40, a 26% bump from its present level.

One warning, though: Republic is up 3% since Goldman Sachs recommended the stock one the merger this morning. Let that action play out, Cramer said, and look to buy RSG next week.

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