Republic Services Is A 'Well-Run Industry Leader,' But Stock Is Fairly Valued

Argus Research has initiated coverage of Republic Services, Inc.

with a Hold rating, saying that though the waste management company is "well-run," it sees limited near-term upside for the stock. "We view RSG as a well-run company, but expect only modest increases in revenue and earnings over the next several years given prospects for limited economic and demographic growth," analyst John Eade wrote in a note. The analyst expects 2016 adjusted EPS of $2.16, up 4.9 percent from $2.06 in 2015, and projects revenue to increase 2.9 percent to $9.4 billion. For 2017, Eade sees EPS to increase by an additional 8.8 percent to $2.35 on a further 3 percent growth in revenue. Eade noted that RSG tends to post stable results despite being sensitive to economic conditions. Over the past five years, the company delivered compound annual revenue growth of 2.4 percent, and adjusted EPS growth of 9.3 percent. "Our financial strength ranking on Republic Services is Medium, the middle rank on our five-point scale. The company scores high on profitability, as its 16.1% operating margin is above the average of 13.3% for peers in the commercial services and supplies industry," Eade highlighted. However, the analyst noted that the company's 9.4 percent return on equity lags behind the peer average of 18.5 percent and its long-term debt/cap ratio of 49.3 percent is slightly above the peer average of 47.3 percent. RSG pays a dividend of $1.20 a share annually and generates a yield of about 2.5 percent. "We think the dividend is secure and likely to grow, as RSG typically generates strong levels of cash flow," said Eade, who projects a dividend of $1.23 for 2016 and $1.29 for 2017. However, the analyst sees limited near-term upside for the stock as he believes "the stock is fully valued at 22-times our 2016 EPS estimate, just above the five-year average multiple of 21.3." Based on projected 2016 EPS and the analyst's five-year earnings growth rate forecast of 7 percent, the stock is also trading at a PEG ratio of 3.1, slightly below the average of 3.4 for peer companies in the commercial services and supplies industry. According to TipRanks, Eade has a success rate of 67 percent with an average return per recommendation of +10.5 percent. The analyst is ranked 163 out of 3,910 analysts. At the time of writing, shares of Republic Services gained 0.27 percent to $47.70.