You can gain solid waste exposure through Waste Management and Republic Services. The two companies form a virtual duopoly over the U.S. trash business that should increase as more cash-strapped municipalities exit the business and M&A activity continues.
Republic is more dependent on core trash collection (77 percent of revenues) than Waste Management (57 percent of revenues) and should see more of a profit kick from servicing growing garbage volumes. The company has outperformed the market this year through operating efficiencies and cost savings from its $6 billion acquisition of Allied Waste.
Kaschalk expects Republic to grow earnings per share by 13 percent this year and 17 percent in 2011, figures sure to rise should volume come back stronger than projected. Easier year-over-year comparisons, the likelihood of dividend increases and a share buyback program, expected to be announced before year end, should also boost profits. Kaschalk rates Republic a buy and sees the shares rising to $38 over the next year.
Another Wall Street favorite is IESI-BFC. The Toronto-based company better known as BFI is less exposed than its competitors to index-based pricing contracts required by some municipalities—which can be a drag in a deflationary environment—and has gained market share and cost savings from its 2010 purchase of Waste Services.
BIN shares are up more than 80 percent in the last year, which may raise a red flag for some investors. Analysts, however, see the momentum continuing. “BIN has a lot more opportunity,’’ says Wunderlich Securities analyst Michael Hoffman, pointing to growth prospects in the New York-Canada, Texas-Louisiana, and Florida regions that could push the stock to $27 in the next year.
Waste Connections sports the highest profit margins in the industry due to exclusive long-term contracts and a concentration in less populated markets where it can charge higher prices. The mid cap company also has a strong balance sheet to drive future growth through acquisitions. Wedbush’s Kaschalk sees the stock moving to $42 over the next 12 months.