Raymond James Downgrades Republic Services On Fall In Recycled Commodity Prices

Raymond James is revising its recycled commodity price estimates downward, which prompted the firm to adjust its stance on Republic Services, Inc. RSG.

The Analyst

Analyst Patrick Tyler Brown downgraded shares of Republic Services from Strong Buy to Outperform and maintained a $72 price target. 

The Thesis

The rationale behind the downgrade is a lack of adequate upside in Republic Services' stock price as well as Raymond James' lower estimates, Tyler Brown said in a Wednesday note. The downgrade is not based on fundamentals, the analyst said. 

With China no longer wanting global recovered paper — and outright banning mixed paper and any other RCP with contamination levels higher than 0.5 percent — the analyst said a glut is likely for certain low-quality paper grades, given that North American mills can consume only a finite amount of mixed paper.

China buys about 65 percent of U.S. RCP exports, according to Raymond James. 

Republic Services' guidance optimistically assumed a pricing recovery in the second half of the year, Tyler Brown said. A recovery is unlikely in the second half, and Raymond James is using today's prices as an estimate moving forward and dropping below Republic's guidance range, the analyst said.

"In our view, they may give some commentary around what current prices in a go-forward sense may mean to earnings vs. the guide, but we doubt at this point they will make a wholesale guidance change, as it is still early in the year and commodity prices may eventually pan out as they expect," Tyler Brown said of Republic's upcoming May 2 first-quarter print. 

Outside of recycling commodity prices, the analyst said solid waste fundamentals remain rock solid, helped by a strong volume outlook, improving CPI prints, rational open market pricing and a strong M&A pipeline.

The Price Action

Republic Services shares have added about 4.5 percent over the past year.

The stock closed down 2.98 percent Wednesday at $65.54. 

Related Links:

Analyst: Waste Connections Could Rise On M&A Activity

7 Instances When Chinese Regulators Cracked The Whip On Internet/Media Firms