Republic Services, Inc. (NYSE: RSG) is a mid-cap company (8.63 B) with its headquarters in Arizona. Republic’s operations primarily consist of the collection, transfer, and disposal of non-hazardous solid waste for commercial, industrial, municipal, and residential customers in 40 states.

The Waste Management Industry

By far and away, the waste management industry is lead by Republic Services (in large part due to their merger with Allied Waste) and Waste Management (NYSE: WMI). On paper, according to the ratios, Waste Management is a better company…today. However, with a good credit rating, a national operating platform, and an eye on future environmentally safe practices, Republic is set to gain on WMI and compete for the top spot in this industry.

Republic Services and Allied Waste Merger

The merger solidifies a national footprint for Republic and brings it to the same class as WMI. Save for being a better leveraged company, Republic falls behind WMI in most other metrics. However, the synergistic efficiencies associated with the merger are expected to produce $150 million in annual savings by the end of next year. Compare that to Republic’s net income for 2008 at $73.8 million and it’s no wonder the two companies would agree to merge to be WMI’s only legitimate competitor. Further, the best practices of two mature companies are being combined. The strengths of Republic (financials) and Allied (integrated operations, procurement) that have each been refined over a number of years complement each other well. The result is a first rate, national company poised to grow laterally and vertically.

I’m attaching the spreadsheet with financial ratios for the eight major players in the waste management industry. Additionally, there’s a tab with facility and market cap breakdowns for WMI, RSG, and WCN.

Waste Management Analysis

With that, I’ll turn it over to Jimmy…

Josh has shown us the numbers and the two major players are clear, Waste Management and Republic Services. The two reasons why I love landfill stocks today is the future rebound in consumption and power generation. Then I will break down why we recommend RSG over WMI.

Consumption

The recession has paid its toll on most stocks, but it has also reduced consumption which has lowered landfill revenues. Both companies are down over 25% on the year in part because of the gray area of where the US’s consumption is heading. Both companies will rebound with a recovery in the market and consumption.

Power Generation

Power generation is the second reason to invest in landfills moving forward. Waste generates methane gas which has four times the green house gas effects of carbon dioxide. In order to regulate the methane, policy over the past year and a half has changed to require the capping of old landfills and the flaring of the collected methane gas. I recently visited a landfill in DeKalb County and the process is simple, over many years a trash heap turns into something like a mountain, to collect the methane they drill hundreds of holes down into the mountain and vacuum it out. The gas is then taken a few hundred yards away and flared or burned. The trash mountain is then covered in a large tarp to prevent methane gas escape. With this regulation in place power generation is an easy choice. All they have to do is build a small power plant next to the trash mountain, burn the methane gas in a generator, and connect to the local power grid. I asked someone at the DeKalb landfill and they currently power 3000 homes with two generators, which only burns half of the methane (the rest is flared). They viewed it as a quality source of revenue and have a desire to expand with more generators over time. As an added bonus, I have owned stock in Allied Waste and now Republic Services and the majority of their issues are with public relations, over time I believe power generation can help change some of the negative public perception of landfills, which can have a positive effect on litigation costs and revenue from what ever doors may open.

Why RSG?

The three reasons why we recommend RSG over WMI are because RSG has a lower price per landfill, RSG has a healthy number of landfills with a high solar potential, and they have a desire to be number one. RSG’s lower price per landfill may be a trivial way of looking at these complicated companies, but it tells me their leadership may have extra opportunities in moving forward. Typically I believe it is nearly impossible to change a companies’ culture – so this under valuation could stick long term, but I think RSG with combining resources of recently acquired AW, having Bill Gates as a major stakeholder (this started only in 2002) and the shift in environmental thinking will prove a shift in culture which will uncover some of this gap in valuation. In addition as time moves forward the many tarp covered small green power plants, which are connected to the local power grid, will become an outstanding location for solar power generation on the south facing side of the trash mountains. RSG is based in Phoenix and has a healthy number of landfills located in outstanding solar locations. The final point to be made is RSG has stated in their annual reports they are on a path to be number one in waste management. This could prove to be positive or negative, but I like the prospects of a company which is growing its business right at the point of time before understanding this new shift in the perception of what a landfill will represent in the future.

Summary

As a recap, the price is ripe because of the recession’s hit in consumption and landfills are in a transformation stage which can increase value in power revenue and potentially brand. We recommend RSG over WMI because of their lower price per landfill, position to a new solar market and an “underdog” mentality.