Republic Services Inc. (RSG) reported fiscal first-quarter EPS of 42 cents, a penny above the prior-year figure and revenues of $1,964.9 million, up 0.4%.
Given the recent improvement in volume growth and pricing trends, strong free cash flow generation that supports further dividend increases and another share repurchase program, we have upgraded our recommendation on Republic Services from Underperform to Neutral. The company currently retains a Zacks #3 Rank (short-term Hold recommendation).
Even though Republic Services’ volumes slipped 0.7% year over year in the first quarter, the company witnessed a sequential improvement of 40 basis points. Volumes improved in all Collection lines of business for the fourth sequential quarter.
More noteworthy is the fact that volumes improved despite the severe weather early in the quarter. Republic Services has guided volumes to be flat to up 0.5% in 2011. Looking ahead, we expect volumes across all lines of business to continue to improve.
The company has successfully raised prices in selective markets. Total price growth in the quarter was 2.6%, with a core price of 1%. In 2011, the company expects a core price of approximately 1% in the first half of the year and in a range of 1.5% to 2% in the latter half.
Republic Services remains committed to an efficient cash utilization strategy, which includes increasing cash returns to shareholders through share repurchase and dividends.
The company plans to review its dividend policy and expects to approve an increase of 5% to 10% at its next board meeting in July. With 50% of its current share repurchase authorization now complete, the company’s board is expected to authorize a new program at the October meeting to carry through 2012.
Republic Services completed the acquisition of two recycling facilities as part of the company’s targeted merger and acquisition strategy. The company remains focused on growing its existing operations in the top 25 markets and will look to spend up to $75 million on acquisitions in FY11. The acquisitions will focus on building Republic Services’ recycling operations.
However, rising fuel costs had a negative impact on margins during the first quarter of 2011. A 27% increase in the cost of diesel fuel led to a negative 120-basis point impact on EBITDA margin.
The company would come up against margin headwinds for the balance of the year if it is unable to implement price increases to combat escalating fuel prices. We thus see a downside risk to the 2011 EBITDA margin guidance of 31.6%, which currently represents an estimated 50-basis point improvement.
The global economic crisis subjected the company to unwarranted pricing pressure necessitated by competition and lower customer turnover. Besides, the recovery in solid waste volumes has historically lagged the recovery in the general economy. Hence, one can never confidently predict that improvement in general economic conditions will result in an immediate recovery in the company’s results.
Republic Services is the second largest domestic non-hazardous solid waste company in the U.S. It provides non-hazardous solid waste disposal services for commercial, industrial, municipal and residential applications through a network of 343 collection companies in 40 states and Puerto Rico. The company owns or operates 201 transfer stations, 195 solid waste landfills and 74 recycling centers. Republic Services competes with Waste Management Inc. (WM) and privately held Waste Industries USA Inc.
REPUBLIC SVCS (RSG): Free Stock Analysis Report
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