William Blair initiated research coverage of Casella Waste Systems, Inc. (CWST $98.52), Republic Services, Inc. (RSG $201.28), and Waste Management, Inc. (WM $207.93), leading providers of solid waste and recycling solutions.
In conjunction with the initiations, analyst Trevor Romeo published a white paper examining the main structural themes affecting companies in the North American waste and recycling industry resulting from an imbalance of waste generation and landfill disposal capacity that he expects to tighten in the coming years.
“As waste generation continues to grow alongside population growth and economic activity,” Romeo said, “we believe vertically integrated owners of existing disposal assets will maintain strong pricing power in their collection and disposal businesses for several years. This will produce consistent price-led revenue growth and margin expansion in the core solid waste and recycling business despite muted volume growth. In addition, more sustainable and circular alternatives to landfill disposal will increase in importance and volume. Ownership of scarce, hard-to-replicate assets at scale will enable the largest waste and recycling companies to strengthen their competitive positioning in an increasingly complex and costly operating environment. This will provide more opportunities for consolidation and investments in efficiency. We believe Casella, Republic, and WM will all benefit from these structural themes, which are enabling greater monetization across the entire solid waste and recycling value chain.”
Romeo said, “We believe Casella’s strong base of solid waste collection and disposal assets concentrated in the Northeast, which has the most acute disposal supply/demand imbalance in the country, provides significant competitive benefits. And as the only remaining public solid waste and recycling company with a market capitalization under $10 million, Casella maintains a large M&A pipeline that could add over 10% to run-rate free cash flow per share, by our estimates. This provides opportunity to both increase density and enter new markets without deviating from core solid waste and recycling. Further, we expect revenue and margin benefits from technology upgrades at Casella’s recycling facilities.
“WM and Republic are the two largest solid waste and recycling providers in North America,” Romeo continued. “As disposal capacity becomes increasingly scarce, we expect price-led growth to continue, given their vertically integrated operations and leading-edge pricing algorithms. As the largest landfill operator, WM is developing the largest portfolio of renewable natural gas assets. In addition, WM’s pending acquisition of Stericycle adds a leading presence in medical waste, which should see midsingle-digit volume growth given an aging population and increasing demand for healthcare services. For Republic, we see potential for the environmental solutions business to be accretive to consolidated volume growth, revenue growth, and adjusted EBITDA growth over the next several years. Balanced contributions from Republic’s sustainability investments, environmental solutions business, and future capital deployment leave room for upside.”
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William Blair or an affiliate is a market maker in the security of Casella Waste Systems, Inc., Republic Services, Inc., and Waste Management, Inc.
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