These stocks are key to improving plastic recycling

Published Fri, Sep 29 20231:09 PM EDTUpdated Fri, Sep 29 20231:33 PM EDT

As advanced recycling strategies gain favor, Barclays sees an underinvested way to play the theme. Analyst Katherine Ogundiya said there are both economic and environmental reasons to consider advanced recycling, which involves purifying plastic so that it can go back into the circular economy. And she said a crop of companies providing the feedstock needed for the process have been overlooked by investors. "Advanced recycling has immense potential to transform the plastic waste crisis," she said in a recent note to clients. Take soft drink bottles. Producers can reduce costs by 27% when the bottles are made using plastic from advanced recycling rather than from virgin plastic derived from fossil fuels, according to data released this year by the American Chemical Society. A 'silver bullet' for waste reduction That adds an economic layer to the argument for advanced recycling, which is also seen by experts as an alternative model that's better for the environment. That's because it can help increase the amount of plastic that gets reused rather than creating more while used plastics head to landfills. It is a "silver bullet" for recycling plastic waste that can't be processed using traditional methods, she said. Ogundiya said investors have been warded off the theme by what she views as unfounded arguments around the maturity of advanced recycling technology. While more investment is needed, the view of the technology as being in its infancy is incorrect given that some elements have been around for about a half century and are at commercial capacity, she said. The idea has also been raised that there's an insufficient need for advanced recycling if plastic is banned. But she noted the demand for plastic continues to rise and there is no global ban expected on at least the near horizon. Despite the misconceptions, she noted recent movement in the market with multiple public companies entering the space in recent years. There's two ways this is mainly happening. First is a direct relationship, with the companies building advanced recycling factories. The other is more indirect, with companies adding products or services needed for companies looking to ramp up capacity. Demand is expected to grow, too. Using global brand commitments as a catalyst for recycled content demand, she estimated that 40 million metric tons of recycled resins will be needed annually by 2030. She referenced McKinsey data showing $100 billion in investments will be required in the advanced recycling space, with nearly two-fifths of that expected to go to increasing collection and sorting capacity. "The combination of these new entrants and the growing trend of plastic producers vertically integrating with private advanced recyclers has made this theme significantly more investible," she said. Here's some of names either traded in the U.S. or with U.S.-listed shares she's following: Feedstock plays There are three key entry points for investors in Ogundiya's eyes: the companies that build feedstock volumes; the advanced recycling companies themselves; and those converting recycled content into plastic. But she said only those that are supporting feedstock growth, sorting and collection feel underinvested and not too overcrowded, especially given how much money is expected to enter the space in the coming years. "Feedstock" is the lingo used for the raw materials brought in to make the new product. Previously unrecyclable waste will gain value because it can serve as feedstock in advanced recycling, but collecting it will be a challenge, Ogundiya noted. Companies including Veolia, Alba, Renewi, Waste Management , Republic Services and Cleanaway Waste Management can all play a role, she said. Waste Management is one U.S.-based company on the list with a wide following on Wall Street. Despite its underperformance this year with a loss of around 2%, the average analyst has a buy rating and sees an upside of nearly 17%, according to LSEG. Republic Services is similarly favored on Wall Street. The average analyst polled by LSEG has a buy rating and an expected upside of almost 15%. The stock has risen about 11.8% this year. Another necessity is the sorting of feedstock, which she said will likely be handled by the companies themselves with little government involvement. In this space, she pointed to Agilyx and Exxon Mobil as having the "first-mover advantage" by setting up sourcing programs. Tomra, which has been sold off this year, is one of the few public companies that specialize in sorting specifically, she added. TMRAY YTD mountain Tomra shares have fallen more than 30% year to date. Advanced recyclers Despite growth in the space, Ogundiya noted there are still just a handful of companies with a notable exposure to advanced plastic recycling. She said Aduro Clean Technologies and Loop Industries are both "pure" plays, but are relatively small. Though considered a small player, Loop has plans to expand capacity through new plants in South Korea and France. Loop has climbed nearly 50% this year, but Wall Street sees even more upside ahead. Of the two analysts surveyed by LSEG, one has a buy rating and one has a strong buy rating on Loop. Between the two, their average price target implies the stock can rally another 75% in the next year. EMN YTD mountain Eastman shares have fall more than 5% year to date. Beyond pure plays, some large chemical and energy companies have advanced recycling capabilities. One of those names is Maire Tecnimont, which does not have shares in the U.S. Another is Eastman , which is also known for being one of a few companies in the space to be at commercial scale. Despite underperforming this year with a 5.6% drop, the company is well-liked on Wall Street. The average analyst has a buy rating and price target implying an upside of more than 22%, according to LSEG. Eastman is known for its long-term relationship with this type of recycling, having used similar processes to recover silver from X-ray films on behalf of Kodak for three decades. The company also has plans to spend more than $2 billion to build out its production. — CNBC's Michael Bloom contributed to this report