Shares of Republic Services , Inc. RSG have gained 13.8% on a year-to-date basis, significantly outperforming the 4.4% rise of the industry it belongs to.
The company has witnessed a 12.6% rise in share price since it posted strong third-quarter 2018 results.
The company's third-quarter 2018 adjusted earnings per share of 82 cents outpaced the Zacks Consensus Estimate by a penny and improved 22.4% year over year. Quarterly revenues of $2.6 billion beat the consensus mark by $1.8 million and improved marginally year over year on a non-adjusted basis and 4.1% on a pro-forma basis.
Republic Services has an impressive earnings surprise history, having outpaced estimates in three of the last four quarters. It delivered average trailing four-quarter positive earnings surprise of 3.9%. Over the past 60 days, the Zacks Consensus Estimate for fourth-quarter earnings has moved up by 2 cents.
What's Driving Republic Services?
Solid Internal Growth
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.
Further, the company continues to look out for strategic price increase in order to offset increased costs, improve operating margins and enjoy an appropriate return on its substantial investments in vehicles, equipment, landfills, transfer stations and recycling centers. The company's business stands to benefit from increasing demand for recycling of waste products.
Republic Services third-quarter 2018 revenue growth includes a positive impact of 2.2% internal growth. The internal growth was basically driven by 2.4% increase in average yield, increase in fuel recovery fees by 80 basis points (bps) and increase in energy services revenues by 10 bps, which were, partially offset by decrease in total volume by 10 bps and 1% decrease in recycling, processing and commodity revenues.
Operational Efficiency Streamlining Cost Structure
Republic Services is focused on increasing its operational efficiency by shifting to compressed natural gas (CNG) collection vehicles and converting rear-loading trucks to automated-side loaders, which will streamline the cost structure, improve revenue quality and enhance growth through profitable investment opportunities. Almost 19% of the company's fleet operates on natural gas and nearly 75% of its residential routes have been converted to automated single-driver trucks.
The company is highly optimistic about the usage of CNG vehicles, which will help it compete effectively on grounds of maintaining a clean environment. Despite higher expenses, CNG reduces the company's overall fleet operating costs through lower fuel expenses.
The tax reform policy (Tax Cuts and Jobs Act, effective since Dec 22, 2017) are contributing to Republic Services' bottom line. The company's third-quarter 2018 earnings included a benefit of 12 cents from the tax reform. The company enjoyed a lower effective tax rate of 22.7% for the reported quarter compared with 37.4% in the prior-year quarter. Reduced taxes will likely lead to greater retention of profits, thus helping the company to allocate more funds toward growth initiatives as well as reward shareholders through share buyback or increased dividend payments.
We are impressed with Republic Services' consistent efforts to reward its shareholders. In the first nine months of 2018, Republic Services repurchased shares worth $574.9 million and paid $340 million in dividends. In 2017, the company repurchased shares worth $610.7 million and paid $440.5 million in dividends. In 2016, the company repurchased shares worth $403.8 million and paid $418.9 million in dividends. Such moves indicate the company's commitment to create value for shareholders and underline its confidence in its business.
Republic Services' balance sheet is highly leveraged. As of Sep 30, 2018, long-term debt (net of current maturities) was $7.56 billion while cash and cash equivalents were $81.9 million. Such a cash position implies that Republic Services needs to generate adequate amount of operating cash flow to service its debt. High debt may limit the company's future expansion and worsen its risk profile.
Additionally, Republic Services 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
Currently, Republic Services 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 Paychex, Inc PAYX , WEX Inc WEX and Automatic Data Processing Inc. ADP , each carrying a Zacks Rank #2 (Buy). Long-term expected EPS (three to five years) growth rates for Paychex, WEX and Automatic Data Processing are 8.5%, 15% and 12.5%, respectively.
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