Waste Management, Inc. (WM), Republic Services, Inc. (RSG) & Waste Connections, Inc. (WCN): ‘Trash Talk’ Now Mostly Positive

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Talking trash might get you into trouble on the basketball court, but in investment circles it might make you some money. That’s because the Big 3 waste service firms — Waste Management, Inc. (NYSE:WM), Republic Services, Inc. (NYSE:RSG) and Waste Connections, Inc. (NYSE:WCN) — are all riding a positive wave that I expect to continue.

As the trio prepares to announce second quarter results at the end of July, the segment continues outperforming the market on both improving numbers and higher expectations going forward. Because of that, market sentiment has accelerated during the last three months and shares of all three are up between 15%-21% this year.

Waste Management, Inc.

Waste Connections, Inc. (NYSE:WCN) has been the biggest gainer since first-quarter results were released. This continues a string of wins over its peers during the last several quarters, despite its lack of presence in the increasingly important energy-conversion space. A concentration on second-tier cities instead of the major metropolitan areas served by its chief competitors, and last fall’s acquisition of a company that serves the potentially huge oil-and-gas waste-disposal market, have definitely struck a chord with investors.

Waste Management, Inc. (NYSE:WM) and Republic continue to be the industry’s top dogs, fielding impressive networks of collection, disposal and recycling operations along with their own landfills and aggressive energy-conversion programs. The combination has proven a winner despite lackluster volume growth and soft pricing for recyclable commodities.

Before second-quarter performance is reported, here’s a reminder of just where each of these companies has been heading.

Waste Management

The biggest in the business, Waste Management, Inc. (NYSE:WM) also remains the most appealing of the segment to me. Recent revenue gains have been negligible, rising just 1.2% year over year in the first quarter after a 0.8% increase in the fourth quarter of 2012. And earnings actually fell 1.8% during the first three months of the year, after missing estimates in the previous quarter. But these shortfalls come from restructuring charges designed to achieve savings and increase yield, and so aren’t as bad as they look.

In fact, the company says these restructurings are starting to bear fruit, and it is on target to achieve the savings expected from them. Additionally, it has raised landfill prices by an average of 5%-7% and implemented new rebate structures in its recycling operations. The result led to core price increases during the first three months of the year that were about double what management had projected earlier for the full year, keeping Waste Management, Inc. (NYSE:WM) on track to meet the positive 2013 outlook it issued in January.

Waste Connections

I’ve been somewhat skeptical of this company’s plans in the past, but must admit that its recent performance has turned me around. The smallest of the Big 3, it has taken its own route and is definitely making it work. In the first quarter revenue rose 20%, profits jumped 26% over the previous year, and both beat analyst estimates. Waste Connections, Inc. (NYSE:WCN) was accordingly the sector’s best performer over the past three months, with its stock up 13% while its peers (as well as the S&P) were up less than 3%.

The company has benefited from improving fundamentals, which are still getting a boost from Hurricane Sandy demolition and renovation activity. An even bigger upside — along with an immediate revenue boost — has come from an acquisition last fall that gave Waste Connections, Inc. (NYSE:WCN) a major position in the newly permitted business of waste servicing for oil and gas exploration and production firms.

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