In the early 1970s, Steve Miller recorded a song called “Your Cash Ain’t Nothin’ But Trash.” In more recent times, a trio of waste service providers has sung a somewhat different version of that tune: “Your Trash Ain’t Nothin’ But Cash.”
But with volumes flat for several years, and the ability to raise prices almost non-existent, the trash business has become much more challenging. And many have started to wonder if the newer version of that old rock tune is slipping off the charts for good.
Until recently, the waste disposal industry proved to be a steady space that generated solid returns. The Environmental Protection Agency estimates that Americans toss out about 4.4 pounds of trash per person every day of every year, helping waste service providers in the U.S. realize annual revenues north of $50 billion.
A decline has been occurring since the onset of the Recession, however, driven by the slowdown in housing and commercial construction, weak retail spending, and trends like diminished newspaper circulation and the use of less packaging in most consumer goods.
More recently, weak recycling commodity pricing has hurt the entire industry even more. All providers derive profits from it, although the amount — estimated at between 5%-10% of revenues — is relatively small. Nonetheless, in an era when volumes aren’t rising, the pain from the collapse in these prices by 35%-40% has proven significant.
Waste Management and Republic Services have long attracted the most attention from investors, in part because together they attract about 40% of all U.S. spending on trash disposal. Combined they also own about two-third’s of the country’s landfills, a huge industry profit center. Waste Connections is the third member of the waste triumvirate, but it has often been treated like an afterthought to the two market leaders even though it, too, has considerable market share in a field where established relationships with municipalities, lengthy contracts and costly rolling stock create significant barriers for expansion. Progressive Waste Solutions , a Canadian firm that serves about 25% of the U.S. and about 60% of its home country, and Paris-based Veolia Environnement , which offers services worldwide, comprise the bulk of the rest of the U.S. market along with a number of regional players.
WM and RSG reported poor 3Q12 results about a month ago and both cut full year earnings guidance. WCN, which reported before its two larger rivals, proved an outlier, reporting 3Q12 net income and revenue above Street expectations. Even so, the period marked the fifth straight quarter that WCN’s margins had contracted. Fighting just that issue, WM has been restructuring to lower its costs and RSG implemented a similar effort in the back half of this year.
With volumes flat or showing only incremental growth now for some time, waste providers have also attempted to gain market share by cutting prices for new customers — a tactic that has grown the base, but further hurt margins. The acquisition of small regional providers is another growth tactic.
Nonetheless, 4Q12 expectations are generally negative. RSG has at least one big supporter: Bill Gates’ Cascade Investments recently put $360 million into the firm, raising its stake to about $2.5 billion. But other than that, most on Wall Street are shying away from the sector. Analyst buy recommendations are virtually non-existent, and sell recommendations are not uncommon.
Is there an opportunity here before Q4 earnings are announced in the first half of February? For more clarity, here are two things to keep an eye on as the quarter unfolds:
Will cleanup from Hurricane Sandy provide a significant boost in waste volume? When the clearing of debris and the beginning of redevelopment kick into high gear, waste volumes in the Northeast will see a massive jump. This would be notable in a period that traditionally sees little such activity — even in good years — because of the onset of colder weather, especially in the affected region. Most likely, though, any uptick will be more noticeable in 1Q13 and beyond.
Will holiday shopping improve, driving a yy increase over generated waste? The horrid economic climate of the past several years, depressing consumer confidence and spending, has also had a negative impact on waste volume growth in this holiday quarter. If shoppers feel emboldened, and sales aren’t hurt by the inability of politicians to avoid the Fiscal Cliff or some other factor, waste service providers could see a healthier year end.
If either of these questions can be answered positively, the firms — as well as investors — might once again be belting out “Your Trash Ain’t Nothin’ But Cash.”
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