The financial markets are all about causality or the relationship between causes and effects. For example, inflation fears usually trigger a spike in government bond yields and gold futures.
Lockdowns, as we saw the previous year, increase the demand for online services like streaming and video calling platforms and remote work apps. Traffic jams in one of the most important shipping transit routes on earth, meanwhile, could raise oil prices and shipping costs.
But what about something even more obvious, but somehow less well-known? To answer that question, we would need to remember one simple thing, one man’s trash is another man’s treasure, sometimes literally.
Have you ever thought about why the mob is often tied to the garbage industry? Because the business is relatively easy to enter and lucrative to control.
According to Statista, the solid waste industry in the United States generated US$63.4 billion of revenue in 2017. According to the US Bureau of Labor Statistics, prices for garbage and trash collection were 416.17% higher in 2021 versus 1983 (an $83.23 difference in value).
What about the perspectives?
Back in 2018, the World Bank published research suggesting that global waste could increase by 70% on current levels by 2050. Driven by rapid urbanization and growing populations, global annual waste generation is expected to jump to 3.4 billion tonnes over the next 30 years, up from 2.01 billion tonnes in 2016.
Additionally, it is worth mentioning that garbage has been resilient even during the coronavirus crisis. Why? Global lockdowns have caused oil prices to plummet, making the manufacture of plastics from fossil fuels less expensive than recycling.
As a result, plastic pollution increased as well as the need for recycling. Thus, it shouldn’t be a surprise that recycling commodity pricing increased. To be more precise, fiber prices have experienced steadily increasing prices and natural HDPE hit record high prices.
And, while many struggled over the past year, the ongoing worldwide shortage of shipping containers suggests that the waste and recycling industry will need to handle additional materials in the future.
In this context, Goldman Sachs analysts believe that it’s still a good time to buy garbage stocks, specifically Republic Services, Waste Connections and Waste Management. Looking at companies’ results, Waste Connections reported 4Q20 above expectations with adjusted EBITDA of $427 million; Republic Services’ revenue for the quarter fell 0.4% to $2.57 billion from $2.58 billion last year, and Waste Management reported 4Q20 results in line with expectations with EBITDA of $1.14 billion.
Thus, we could say that overall, 2020 wasn’t a bad year for the industry.
2020 – a good year for the garbage industry
It can be due to a combination of factors, including strong pricing, volume recovery and higher commodity prices YoY. On top of that, the current 2021 outlook doesn’t include future reopening that will eventually happen.
But numbers don’t lie and already in 4Q20 solid waste saw an improvement in volumes. As economies start reopening and vaccination campaigns gained momentum, this trend could continue and, as a result, the higher volume will drive greater earnings growth.
Goldman Sachs has also highlighted that there are not many garbage companies per municipality. Also, there are not many waste-processing plants, thus even if the number of garbage companies increases, they will still end up in the same place.
As a result, profitability per ton of trash for public companies has increased 20-25% since 2008. This allowed big sharks of the business to take over smaller companies. Currently, the top four solid-waste players account for 56% of US landfill industry volumes, compared to 38% in 2008.
Currently, Waste Connections trades at 33 times estimated 2021 earnings, against its five-year average of 28 times; Waste Management, 25 times 2021 profits, versus 22; and Republic, 25 times, versus 23. Goldman Sachs’ price targets are $145 (WCN), $124 (WM), and $117 (RSG), some 10%, 11%, and 14% above recent levels.
Final thoughts …
Of course, it doesn’t mean that waste companies have only one path in the future (growth), but the possibility of further improvement and recovery is high. Besides that, it is always good to keep into consideration resilient alternatives to the technological sector.
Also, don’t forget to learn about alternative companies and ETFs, such as VanEck Vectors Environmental Services ETF, that could reduce potential risks.