Republic Services (RSG) May Return Multiples as Housing, Economy Firm - Barron's

December 12, 2012 11:56 AM EST
Republic Services (NYSE: RSG) is one smelly stock that could turn into a treasure trove for investors, according to a Barron's article out recently.

Shares of Republic Services have been up and down over the last year, moving between a range of $25.15 to $31.32. The company is up 5 percent over the same period last year, lagging the S&P 500's 13 percent gain and of about 13 percent from a mult-year high hit in May 2011.

Profits at the Waste Management (NYSE: WM) competitor have been hampered as consumption has gone down with uncertainty in the economy as well as the downturn in the housing market leading to less construction. Both have led to less need for Republic Services to haul away trash. The impending fiscal cliff, if not resolved, could also put the kibosh on medium-term plans for the company.

The downturn has also lead Republic Services to be able to implement better cost controls, positioning itself better as economic conditions continue improving.

Some analysts see Republic Services returning about 30 percent to investors over the next year via its 3.2 percent dividend yield and price targets around $37. That target implies a multiple of 16 times earnings, from a multiple of 15 times currently enjoyed by the stock. Last week, for instance, Goldman Sachs added the stock to its Conviction Buy List and Bill Gates' Cascade Investment increased its stake by 14 percent to 89 million shares.

Republic holds about 16 percent of the waste removal industry in the U.S. and garners about $1 billion per year from landfills and recycled material transfer.

Over the last five years, municipal waste volumes shrank 19 percent, Barron's notes, which is on top of a global collapse of recycled goods prices, particularly cardboard. That has led to Republic Services growing profits about 3 percent per year over the last five years, with analysts seeing the company report EPS of $1.84 in FY12, down 6 percent from FY11.

Goldman sees Republic Services earning $1.98 in FY13, moving to $2.33 in FY14. What's more is that free cash should improve to $700 million in FY13, allowing Republic Services to continue its rich payout.

Should the housing market continue showing some promise in recovery and lawmakers come to an agreement over tax hikes and spending cuts, Republic Services investors could find a gem amongst all the rubble. Shares are up 0.4 percent on the session Wednesday.

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