William Blair initiates coverage of 3 waste firms

Chicago-based equities advisory firm William Blair has appointed equity research analyst Trevor Romeo to initiate coverage of three companies in the solid waste and recycling industry: Houston-based WM; Phoenix-based Republic Services Inc.; and Vermont-based Casella Waste Systems Inc.

Romeo’s initial assessment assigns an “outperform” rating to all three waste and recycling firms, in a 47-page report, “One man’s trash is an investor’s treasure: Structural drivers of greater monetization across the solid waste stream.”

The William Blair researcher writes in an introduction to his new report, “Investors familiar with these names are likely aware of the positive attributes of their business models, such as strong pricing power, predictability and resilience and steady earnings and cash flow growth.

“However, not as much attention has been paid, in our view, to the structural drivers and persistence of these significant advantages, particularly as we see increasing concern over high valuations and limited upside reflected in sell-side ratings (which are roughly split between buy and hold ratings for both WM and Republic Services).”

Leading companies in the solid waste and recycling industry do much more than just pick up garbage and recycling from your curbside collection bins, he says, pointing to several ways firms like WM, Republic and Casella are leveraging both landfill ownership and recycling and circularity options to their advantage.

The current and future U.S. landfill capacity situation, Romeo says, suggests nearly half of all open municipal solid waste (MSW) landfills, representing over half of all annual tons accepted into landfills today, are currently expected to close by 2050.

He continues, pointing to the Northeastern U.S. in particular, “As waste generation continues to grow alongside population growth and economic activity, we see an imbalance of waste generation (i.e., demand) and landfill disposal capacity (i.e., supply) that is set to tighten in the coming years.”

That situation, according to Romeo, will lead to three main structural themes affecting the sector, including the three firms he is covering: 1) vertically integrated owners of existing disposal assets will maintain strong pricing power in their collection and disposal businesses for several years; 2) more sustainable and circular alternatives to landfill disposal (recycling and other waste diversion methods) will increase in importance and volume; and 3) the ownership of “scarce, hard-to-replicate assets at scale,” such as landfills, material recovery facilities (MRFs), transfer stations and mass burn waste-to-energy plants, will enable the largest waste and recycling companies to strengthen their competitive positioning.

The William Blair researcher says of Casella Waste, Republic Services and WM, “We believe all three will benefit from these structural themes, which are enabling greater monetization across the entire solid waste and recycling value chain. In other words, what’s inside those bins on your curb may be worth more than you think.”

The investment, profitability and merger and acquisition prospects within the waste and recycling sectors are the leading topics of discussion at the Corporate Growth Conference, held each November in Chicago and hosted by Waste Today and the Recycling Today Media Group.