Economic trends and peer analysis have turned Morgan Stanley analysts bullish on Republic Services, Inc. RSG.
The Republic Services Analyst: Jeffrey Goldstein upgraded Republic Services from Equal-Weight to Overweight and increased the price target from $109 to $126.
The Republic Services Takeaways: Waste company revenues are driven by service price and waste volume, said Goldstein in a Tuesday morning note.
The current economic environment plays well into both of these revenue drivers and should deliver material growth to the waste management industry as a whole, said the analyst.
Many pricing contracts in the industry are tied to shifts in inflation, which has shown signs of increase, hinting at increased contract pricing, he said.
Waste volumes are positively correlated with GDP and consumer spending, both of which are “accelerating above trend over the next two years,” Goldstein said.
Republic Services is trading below its historical average in comparison to peers Waste Management, Inc WM and Waste Connections, Inc WCN, the analyst said.
In the past, Republic Services traded at a 0.5x discount on next fiscal year EBITDA to Waste Management and a 3.8x discount to Waste Connections; however, it now respectively trades at 1.2x and 4.6x discounts, according to Morgan Stanley.
Republic Services should be able to close this discount gap as it had “the best COVID performance amongst the group,” and management has indicated increases to margin estimates and free cash flow over the next couple of years, said the analyst.
The $126 price target represents a 14x multiple on 2022 EBITDA, said Goldstein.
RSG Price Action: Republic Services shares were down slightly on the day Tuesday, closing at $112.61.
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