Services Sector Ideas

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>>> Republic Services Raises Full-Year Guidance Again as Second-Quarter Results Better Than Expected


Morningstar

by Brian Bernard, CFA, CPA

Jul 30, 2021


https://www.morningstar.com/stocks/xnys/rsg/quote


Wide-moat rated Republic Services reported strong second-quarter results as its end markets continue to recover. Revenue increased almost 15% year over year as the firm benefited from strong pricing, a significant rebound in volume, favorable recycled commodity prices, and acquisitions. Core price increased 5.2% during the second quarter, compared with 4.3% last quarter and 4.7% during the year-ago quarter. While volume had an easy prior-year comparison due to the pandemic (second quarter 2020 volume was down over 7%), the 8% year-over-year volume gain during the quarter exceeded management's expectations.

Republic Services' recycling operations contributed 100 basis points to revenue growth as recycled commodity prices increased 68% year over year to $170 per ton. Finally, the company has spent $567 million on acquisitions so far during 2021, which accounted for 200 basis points of revenue growth during the second quarter. Management said the firm has a full acquisition pipeline, and "well over" $600 million is earmarked for acquisitions in 2021. Republic Services' adjusted EBITDA margin expanded 110 basis points to 30.6% primarily due to strong pricing and operating leverage. Favorable recycled commodity prices accounted for 50 basis points of EBITDA margin improvement.

After a strong second quarter performance, management raised its full-year adjusted EPS and free cash flow guidance. Adjusted EPS is expected to range between $4.00 and $4.05 ($3.74-$3.79 previously), and revised adjusted free cash flow guidance is now $1.450 billion-$1.475 billion ($1.350 billion-$1.400 billion previously). After reviewing Republic Services' second-quarter results and revised 2021 outlook, we're maintaining our $85 per share fair value estimate.

Business Description

Republic Services ranks as the second- largest integrated provider of traditional solid waste services in the United States, operating roughly 186 active landfills and more than 200 transfer stations. The company serves residential, commercial, and industrial end markets. It also runs a sizable recycling operation in North America.

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