Republic Services Earnings: Pricing Power Continues To Drive Strong Results

Wide-moat-rated Republic Services RSG reported strong second-quarter results that exceeded our expectations for revenue growth and adjusted EBITDA margin. We’ve increased our fair value estimate by approximately 6% to $127 per share, primarily due to our more optimistic profit margin outlook and the time value of money.

Republic Services’ significant scale and irreplicable disposal infrastructure drive strong pricing power, which has supported sustained organic top-line growth. During the quarter, core price increased 7.3%, an acceleration from the 6.2% core price growth achieved during the year-ago quarter, outpacing inflationary pressures.

Total revenue growth for Republic was 9.1%, of which 4.4% was attributable to acquisitions. Management provided some color on growth attributable to acquisitions for the year, guiding toward 4.25%. Sales growth attributable to volume remained muted; volume increased only 0.4% year over year as headwinds in construction and demolition prevented further gains.

Adjusted EBITDA margin expanded 40 basis points year over year to 30% as margin gains from favorable net fuel expense and underlying operational improvement more than offset margin headwinds from lower recycled-commodity prices and acquisitions. Recycling revenue tumbled 30% year over year as the average recycled-commodity price fell from $218 per ton last year to $119 during the second quarter. Republic’s second-quarter adjusted EBITDA margin was approximately 100 basis points above our expectations due to better pricing and lower integration costs of prior acquisitions than we were anticipating.

In conjunction with an 8% increase in the quarterly dividend, management raised its full-year guidance, anticipating total revenue of $14.813 billion (assuming 6.0% average yield and volume growth of 0.5%), adjusted EBITDA of $4.35 billion (29.4% margin), and adjusted free cash flow of $1.913 billion. All financial targets are at the midpoint of guidance.