In a way that parallels the steep decline of stock markets over the past year and their recent gradual correction, the fortunes of the “big three” publicly traded waste disposal companies have begun to turn around after almost two years of carnage. Simply put, they’re back!
The “big three,” of course, are Waste Management Inc. (WMI), Allied Waste, and Republic Services Inc. Collectively, these companies represent 50 per cent of all the solid waste business in North America. According to Standard & Poors, that’s half of an overall CD$66.2-billion business that grows annually between two and five per cent.
As readers of this publication already know, the industry consolidated through mergers and acquisitions in the last decade. In 1997, USA Waste Services bought United Waste Systems and a year later swallowed industry giant WMI in a reverse takeover. The “new” WMI then bought Eastern Environmental Services in 1999 and also the industrial division of Allied Waste. The company is worth an incredible US$26.9-billion. Allied, meanwhile, acquired Laidlaw Waste Systems in 1996, American Disposal Services in 1999 and, that same year, Browning-Ferris Industries. Today, this number-two industry giant enjoys a market capitalization of $5-billion, followed closely by Republic at US$4.7-billion.
It was only a matter of time before the major players moved from acquisitions (that made them unwieldy) to strategic divestitures, then on to the current challenge: growing their businesses from within. For the companies, that means greater integration and better internal monitoring. (As they say, you can’t manage what you don’t measure.) For customers, alas, this means higher prices.
The three industry giants have much about which to be upbeat. Tip fees are set to rise as economic expansion, increasing waste volumes (2 to 4 per cent each year) and the ongoing closure of municipal dumps eventually take excess landfill capacity out of the market. (In the United States, the number of small town dumps has declined 50 per cent since 1996 and existing landfill capacity is only 19 years.) Toronto illustrates the point. For decades the city paid low fees at its own Keele Valley landfill but now must pony up more than $50 per tonne to have a private company export its trash to Michigan.
The industry isn’t entirely recession-proof. The combination of high fuel prices and bad weather cut into profits this winter. Some recycled fibre categories fell 60 per cent in price. Also, a downturn in manufacturing has led to lower waste generation as businesses work their way through excess inventories. However, multi-year contracts with municipalities have helped offset losses in some areas.
As the Investors’ Business Daily recently reported, the large waste firms benefit from vertical integration and high operating margins (in the mid-teens for WMI and the low 20s for the other two). Making an after-tax profit hasn’t been easy in the past two years but the companies are turning the corner.
On March 12, WMI announced that it will use PeopleSoft technology in an “enterprise-wide transformation program,” starting with the human resource and finance departments. The company has emerged from a difficult restructuring, a mountain of debt, an accounting scandal and a series of management changes that finally brought turnaround specialist Maurice Myers to the helm in late 1999. Mr. Myers told shareholders at the company’s annual meeting on May 18 that he expects to meet analysts’ earnings forecasts for the year of $2.09 per share (before special items) compared to $1.84 last year. His challenge will be to do this while rolling out expensive improvement programs in the last two quarters.
WMI managed to double its profits for the first quarter of 2001, in part by keeping such things as overtime under control. In contrast, Allied missed its first-quarter earnings estimates of US$66.8- million (or 20 cents a share) on flat revenues of $2.15-billion. This was three cents below the same period last year and a penny behind analyst estimates. Yet the value of Allied shares more than doubled over the past 12 months and even outpaced the decent performance of WMI.
The big three are now in the top ten per cent of all publicly traded companies in terms of earnings per share. (Republic, whose share price rose to US$29 from $16.90 in November, is in the top 6 per cent.) WMI stock has risen to about $41.58 from a two-year base that dipped at one point below $21.56. The new high is nowhere near the lofty $84 reached in the spring of 1999 before an accounting scandal cut the price in half in less than a month, but it might return there soon. Allied shares have also recovered to $26 — a price not seen since spring 1999 — from a long low that at one point touched nine dollars.
Better yet, in just six months the overall environmental service industry — of which solid waste is a large component — has moved from the 55th spot to number ten out of a total of 197 industry categories commonly tracked by investors. And the shares of the waste companies in particular are under accumulation by institutional money managers.
The resurgence of these companies will not be welcome news to everyone. The purveyors of alternative waste diversion technologies, like the famous “dot com” companies last year, probably hoped that the problems of the traditional haulers signaled the dawn of a new era. Their time will come, but like the dinosaurs and the mammals, they’ll have to coexist for a while.