Republic Services Hits 52-Week High On Solid Q3 Results

Shares of Republic Services, Inc. (NYSE:RSG) hit a 52-week high of $54.92 on Nov 15, closing a notch lower at $54.91, reflecting a healthy year-to-date return of 24.8%. Despite the strong price appreciation, this Zacks Rank #3 (Hold) stock still has more room to run. The stock is currently trading at a forward P/E of 24.7x and has long-term earnings growth expectation of 8.5%.

Growth Drivers

Republic Services continued with its steady performance in third-quarter 2016 with adjusted earnings of $212.6 million or 62 cents per share, compared with $184.7 million or 53 cents in the year-earlier quarter. Adjusted earnings in the reported quarter exceeded the Zacks Consensus Estimate by 4 cents.

Revenues improved 2.8% year over year to $2,409.3 million and were in line with the Zacks Consensus Estimate. The upside in revenues was driven by a 2.1% rise in average yield and a 0.6% increase in volume, partially offset by lower fuel recovery fees of 0.6%. Core price boosted revenues by 3.2% during the quarter.

In concurrence with the solid quarterly results and expectations that recycled commodity prices will remain at current levels for the remainder of the year, management raised the guidance for 2016. The company expects adjusted earnings in the range of $2.19–$2.20 per share, up from the prior guidance of $2.13–$2.17. Additionally, adjusted free cash flow is projected in the band of $840–$850 million, above the earlier projection of $820–$840 million. The current Zacks Consensus Estimate for 2016 is pegged at $2.19, well within the guided range.

Republic Services also offered a preliminary outlook for 2017 on the basis of the current economic conditions. Adjusted earnings are expected within $2.31–$2.36 per share, while adjusted free cash flow is expected between $875 million and $900 million. Both the performance metrics represent mid to high single-digit growth compared to 2016.

The company is currently focusing on increasing its operational efficiency by converting to compressed natural gas collection vehicles and conversion of rear-loading trucks to automated-side loaders, which will reduce cost and improve profitability. Republic Services is focused on enhancing its operations by streamlining the cost structure, improving revenue quality and seeking growth through profitable investment opportunities.

The company is also realigning its field support functions by combining two organizational layers and expects these initiatives to rake in approximately $25 million of annual cost savings starting 2018. As part of the realignment program, the company centralized the management structure for recycling operations. The new organizational structure is likely to ensure a clear ownership for the recycling and processing market vertical. Republic Services is further transitioning to a fee-based recycling processing model to cover processing costs and generate a healthy ROI.

These strategic steps along with the healthy third-quarter 2016 results might have boosted investor confidence, catapulting the shares to a new 52-week high.

Stocks to Consider

Some better-ranked stocks in the industry include Waste Management, Inc. (NYSE:WM) , Applied Industrial Technologies, Inc. (NYSE:AIT) and Middleby Corp. (NASDAQ:MIDD) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Waste Management is currently trading at a forward P/E of 23.2x and has beaten estimates in each of the trailing four quarters, the average earnings surprise being 4.8%.

Applied Industrial has a long-term earnings growth expectation of 12% and is currently trading at a forward P/E of 21.8x.

Middleby has a long-term earnings growth expectation of 22% and is currently trading at a forward P/E of 25.9x.

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