The popular saying goes that ‘one person’s trash is another person’s treasure’. On Wall Street they believe it blindly. The sector seems incomprehensible on the stock market. That makes the companies in charge of cleaning up the mess an enviable business. In North America, the market for non-toxic waste collection, transportation, treatment, and disposal—what connoisseurs call solid waste services—has undergone decades of consolidation—and is publicly traded.
Trash represents a stable market in North America and a very lucrative one. The companies that provided these services have grown and consolidated their position over several decades, with the giants Waste Management, Republic Services and Waste Connections being the main companies in the sector. The provision of solid waste disposal services is comparable to ‘utilities’, with defensive qualities that come from the constant need of clients to eliminate the garbage they generate in homes and businesses.
In addition, they have the similar ability to grow in a way that public companies could never possess and also qualities to monopolies and extensive pricing power to keep up with inflation. Barriers to entry are and customers have little chance of seeking a better offer, the higher they get the sector very useful pricing power in an inflationary context. What council or government supports a garbage strike?
In terms of recycling, companies have a business that can also be profitable, but their income depends on the market prices of the different classes of classified recyclable materials. Today, the three vertically integrated giants at the top of the landfill industry – Waste Management, Republic Services and Waste Connections – have a combined stock market valuation of more than $130 billion.
However, this is not being his year. Shares of companies specializing in waste collection and treatment fall in 2023 in favor of other defensive sectors, despite the fact that they have the ability to grow in ways that utility companies never could.
But their low profitability makes Waste Management, Republic Services and Waste Connections more attractive from a valuation standpoint now than they have been in years. “The industry has been penalized in the markets, the fundamentals are still good, [y] The outlook is for healthy margin expansion in 2023,” Michael Hoffman, an analyst at Stifel, told Barron’s.
A business that smells bad but is solid
It’s not hard to see why garbage is such a stable business. Waste is cumulative, so it needs to be hauled away and disposed of. While the amount of trash goes up and down with the economy—a restaurant, for example, gets fewer customers and produces less food waste during a recession—commercial and industrial contracts tend to be long-term and tied to the size of a bin. . “During an economic downturn, trucks and stations have less trash to deal with, which lowers the cost of doing business and offsets any cutbacks in service when contracts are renewed,” says Hoffman.
For residential trash, companies in the United States often contract directly with homeowners on monthly or annual terms, and with municipalities and homeowners’ associations on multi-year terms, often granting them exclusive rights. Customers have little chance of looking for a better deal. And new competition is unlikely, given the high barriers to entry: construction of landfills or other waste treatment infrastructure is unpopular and subject to extensive federal and local regulation.
“Years of mergers and acquisitions have spawned a dwindling number of small publicly traded companies, such as GFL Environmental and Casella Waste Systems, and private equity or family-owned businesses,” Morgan Stanley says in a report. This dynamic gave the sector pricing power that came in handy in 2022, when inflation soared.
The general rate increases, in the single digits, were enough to deal with the increase in costs – mainly labor – and little else. In 2023, the increase in prices in the sector could be less than last year, but they will be transferred to a greater extent to the results of companies. Hoffman estimates 5-6% growth across the industry, and around half a percentage point of profit margin expansion.
“We are delighted with its ability to leverage pricing power, which began long before the current inflationary juncture,” said Bryant VanCronkhite, senior portfolio manager and co-head of the global equities task force at Allspring Global Investments.
Being the 2020s, waste collection is also about its reduction and reuse. The companies have a busy recycling business, the income of which depends on the market prices of the various classes of sorted recyclable materials. As in any market, prices go up and down, which can affect the results of the company.
Cardboard prices rose unsustainably during the boom in online shopping – to about $150 a ton – and plummeted to as low as $35 late last year. “A rebound is possible, as governments’ minimum recycled content mandates and corporate sustainability commitments will drive more demand and firmer prices in years to come,” he concludes.