Five ways into the waste sector
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Senior Writer
Eoin Gleeson Mar 05, 2010
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Garbage is the ultimate play on a growing global population. Since 1960, the amount of solid waste we create every year has tripled, while the population has grown by less than 100%. As China and India get richer, they'll throw out more paper, plastics and metals. America produces 700kg of municipal waste per person, compared to Nairobi's 220kg, says The Economist. We can no longer let this waste just pile up in the dump. In America, landfill space is abundant. But that's not the case elsewhere, particularly in densely populated countries such as Singapore and Japan, or Britain for that matter.
Then there's the stuff we're throwing away – hazardous metals in computers, televisions and mobile phones. This is where Regenersis (LSE: RGS) comes in.
The company is one of Europe's leading phone recyclers. It collects unwanted mobiles from major phone companies and sells them to suppliers in the developing world. Thanks to Europe's WEEE directive, Regenersis can produce handsets for as little as $5 each for basic models, and $100 for top-of-the-range ones. Of the phones it collects, 70% are reused or sent overseas, while 30% go to factories in Europe to be recycled. On a trailing Enterprise Value/Ebitda multiple of 4.2, the stock is very cheap, says Paul Hill in his Precision Guided Investments newsletter.
Warren Buffett recently raised his stake in garbage group Republic Services (NYSE: RSG) from 3.6 million to 8.3 million shares. The company has long been a favourite of ours too. In the trash management business, size matters. And much of US landfill space is split between Republic and its rival, Waste Management (NYSE: WM) – allowing them to charge handsome fees for dumping. But Waste Management is also investing heavily in waste-to-energy. The $16bn public waste group runs 115 gas-to-energy facilities that use methane from decomposing organic material. Revenues from its recycling unit grew 14% in the last quarter, to $231m. This is a smaller part of the business than its collection business – which saw turnover fall 1% to $2bn on weakness in construction and industrial waste. But the group maintains a solid profit margin of 7%. It trades on a forward p/e of 14 and pays a dividend of 3.5%. It's a solid play on waste collection and landfill gas.
The business of animal rendering and recycling is serving Darling International (NYSE: DAR) well during this recession. Darling is America's biggest independent rendering group – collecting and handling animal byproducts and grease from restaurants and slaughterhouses. It looks after one in ten of McDonald's branches in the US. It turns the waste into byproducts, such as bone meal, used by farmers as cheap alternative to corn or soybeans. But a deal with oil refining giant Valero Energy also means the company will be processing this waste into biodiesel. The deal could add another $137m to its $660m market cap by 2013, reckons analysts at Jessup & Lamont. The group has $22m in net cash on the balance sheet and trades on a forward p/e of 12.4. The share price has risen by 20% since we tipped it in November, but we still rate it a buy.
Sharps Compliance (Nasdaq: SMED) is a medical waste disposal expert in America. Hospitals pack their needles, surgical knives and other sharp implements into its puncture-resistant containers and send them off to a disposal centre. More than a third (36%) of its sales comes from healthcare providers, with 30% from the US government (emergency services). The $95m company has more than $20m in deals with big pharmaceutical companies sitting in the pipeline, says Joel Greenblatt on Seeking Alpha. It's a small company in an industry with low barriers to entry. But with big pharma and government contracts coming in, the forward p/e of eight makes it worth the risk.
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