RSG or WCN: Which Waste Removal Stock is a Better Buy Now?
The waste management industry stands to benefit from the growing adoption of advanced waste collection and recycling techniques. The industry is likely to gain traction backed by rise in population, increase in environmental awareness and rapid industrialization and urbanization. Strict government restrictions to limit landfills, introduction of sustainable waste management mechanisms and a check on illegal dumping are also expected to create opportunities for the industry.
Per a new report by Allied Market Research, the global waste management market size is projected to witness CAGR of 6.2% from 2017 to 2023 to reach $435.0 billion.
The Zacks Waste Removal Services industry currently carries a Zacks Industry Rank #88, which places it in the top 35% of more than 250 Zacks industries and indicates solid near-term growth prospects.
The industry is housed within the broader Zacks Business Services sector, total earnings for which are expected to be up 10.1% on 4.4% higher revenues in fourth-quarter 2018, per the latest Earnings Preview report.
Given this backdrop, it is not a bad idea to undertake a comparative analysis of two waste removal services stocks - Republic Services Inc. RSG and Waste Connections, Inc. WCN - ahead of their respective Q4 earnings reports. While Republic Services is slated to report on Feb 2, Waste Connections is scheduled to unveil earnings on Feb 13. At present, Republic Services' market capitalization is $24.75 billion while that of Waste Connections is $21.19 billion.
Let's delve deeper to find out which company is better positioned ahead of the Q4 reporting cycle.
Zacks Rank & Style Score
Currently, both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
However, with an attractive VGM Score of B, Republic Services enjoys an edge over Waste Connections, which has a VGM Score of C. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.
Republic Services clearly scores over Waste Connections in terms of price performance. In the past year, shares of Republic Services have gained 11.6%, outperforming the 3.5% rise of the industry it belongs to. Waste Connections has returned 10.8% in the same time frame.
Earnings growth along with stock price gains is often an indication of a company's strong prospects.
Republic Services' fourth-quarter earnings are projected to grow 27.9% compared with 17.3% for Waste Connections. Looking at the full-year 2018 picture, Republic Services' earnings are projected to grow 26.3% while that of Waste Connections are expected to increase 16.7%.
Thus, Republic Services has an edge over Waste Connections in terms of quarterly and yearly projected earnings growth.
Earnings Surprise History
Earnings surprise history helps investors have an idea of the company's performance in the previous quarters.
Both Republic Services and Waste Connections have an impressive earnings surprise history, with their bottom line surpassing the Zacks Consensus Estimate in three of the previous four quarters.
However, Republic Services delivered higher average positive earnings surprise of 3.9% compared with 2.7% for Waste Connections.
Net profit margin helps investors evaluate a company's business model in terms of pricing policy, cost structure and operating efficiency, and shows how good it is at converting revenues into profits. Hence, a strong net profit margin is preferred by all classes of investors.
With a TTM net margin of 15.1%, Waste Connections not only compares favorably with the industry's figure of 14.5% but also has a lead over Republic Services' 13.9% TTM net margin.
EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization) ratio is the commonly used metric for valuing waste removal services stocks because of their high debt levels.
We observe that while Republic Services and Waste Connections have EV/EBITDA ratios of 13.7 and 17.9, respectively compared with the industry's figure of 12.0. Although both the companies compare unfavorably with the industry, Republic Services has a lower EV/EBITDA value than Waste Connections.
So, in terms of aggregate valuation, Republic Services is undervalued compared to Waste Connections.
Our comparative analysis shows that Republic Services scores over Waste Connections in terms of price performance, quarterly and yearly projected earnings growth and earnings surprise history. Waste Connections has an edge in terms of net margin.
Despite a faster share price rally in the past year, Republic Services is cheaper than Waste Connections.
Other Stocks to Consider
A few top-ranked stocks in the broader Zacks Business Services sector include Cardtronics CATM , Booz Allen Hamilton BAH and Advanced Disposal Services ADSW . While Cardtronics sports a Zacks Rank #1, Booz Allen Hamilton and Advanced Disposal Services carry a Zacks Rank #2.
Long-term expected EPS (three to five years) growth rate for Cardtronics, Booz Allen Hamilton and Advanced Disposal Services is 12%, 14.4% and 13.3%, respectively.
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