Bill Gates Buys Even More Trash

Cascade Investment, which invests much of Bill Gates’s wealth, has been buying Republic Services, Inc. (NYSE:RSG) again. Between September 26th and September 28th, Cascade bought about 1.7 million shares of the company at an average price of about $27.35. Republic Services, Inc. collects and disposes of waste from residential, commercial, and industrial disposers. At the end of this round of buying, Cascade owned 78 million shares of Republic Services.  See a history of insider purchases at Republic Services, including those by Cascade.

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Republic’s revenues in the first two quarters of 2012 were essentially even with the same periods in 2011. The company did see higher costs, which slightly pulled down operating income, but a nonoperating expense- losses resulting from the extinguishment of debt- was down to about $100 million this year versus $200 million last year, and combined with a smaller provision for income taxes Republic’s net income was up. For the first half of 2012 earnings per share came in at 79 cents, compared to 54 cents in the first half of last year. However, we would focus on the decline in operating income as the improvement in debt extinguishment costs is not sustainable in the long term.

Republic’s market capitalization of about $10 billion places its trailing P/E at 15, a bit expensive on a pure value basis, yet looks intriguing from the perspective of a defensive investor: the stock pays a 3.4% dividend yield and its beta is only 0.6, meaning that while correlated with the broader market it tends to rise or fall less than the S&P 500 does on a statistical basis. In addition, analyst consensus is in fact for Republic Services, Inc. to grow its earnings per share next year, resulting in a forward earnings multiple of 13.

During the second quarter of the year, East Side Capital increased its own stake in Republic by 68% to a total of 2.9 million shares, elevating the company to one of the top ten slots in East Side’s 13F portfolio (see more stock picks from East Side Capital). East Side is managed by Steven Richman. Phil Gross and Robert Atchinson’s Adage Capital Management also added shares, closing June with 1.7 million shares in their portfolio. Gross and Atchinson had formerly worked at Harvard Management, and the endowment owns a minority stake in their current fund (find more stocks Adage owns).

Waste Management, Inc. (NYSE:WM) and Waste Connections, Inc. (NYSE:WCN) are two of Republic’s peers in the waste collection and disposal industry (as might be inferred from their names). Waste Connections doesn’t look like a good value: it trades at 22 times trailing earnings and 19 times forward earnings estimates, with a lower dividend yield than Republic. We wouldn’t recommend it and it might make for the short side of a pair trade. Waste Management looks more appealing. Its trailing P/E is 16, a hair higher than Republic’s, but Waste Management provides market leadership at a market cap of nearly $15 billion and a 4.4% dividend yield. The only catch regarding Waste Management is that its earnings were down 12% last quarter from what it did in the second quarter of 2011. That is something that should be investigated further before buying the stock: is the company likely to rebound, or continue declining?

We can also compare Republic to smaller waste disposal company Progressive Waste Solutions Ltd (NYSE:BIN) and Covanta Holding Corporation (NYSE:CVA), which focuses on waste-to-energy services. Progressive Waste Solutions was actually unprofitable in 2011, and despite squeaking out some revenue growth last quarter compared to a year ago saw net income fall. It trades at 16 times forward earnings estimates, and we don’t think it is a buy. Covanta’s focus apparently gets it a lot of attention: its trailing and forward P/Es are 32 and 26, respectively, despite flat revenue growth over the last year. Its dividend yield of 3.5% is nice, but doesn’t justify this much of a valuation premium. We think Waste Management or Republic- whichever an investor can feel more confident in growing its business going forward- is the best buy.