Republic Services Closes Out Strong 2022; US Ecology Integration Going Well

Wide-moat-rated Republic Services RSG reported strong fourth-quarter results that moderately outpaced our revenue and EPS expectations. Total fourth-quarter revenue increased 19.5% year over year, mostly driven by acquisitions (11.2%) and increased pricing and volume (8.4% and 1.5%, respectively). Republic Services’ pricing power remains robust and has reached record levels.

The US Ecology acquisition (closed in May 2022) was by far the firm’s largest acquisition during the year, contributing approximately $1 billion of annualized revenue. Integration efforts appear to be going well; management said cost synergies are being realized faster than expected, and revenue came in approximately $50 million ahead of its target. While we think there has been some debate about whether aggressively making a splash in the adjacent environmental-services market via this acquisition is a prudent strategy for Republic, in our view it makes strategic sense, and we think the firm paid a fair price.

Fourth-quarter adjusted EBITDA margin of 27.3% fell 80 basis points year over year. Strong EBITDA margin expansion in Republic Services’ core business (a 110-basis-point gain) and favorable fuel expense (plus 20 basis points) was offset by the margin-dilutive US Ecology and other acquisitions (a 130-basis-point drag) and an 80-basis-point reduction from lower recycled commodity prices, which have been a headwind for the firm’s recycling operations.

Republic Services is poised for another good year in 2023. Management issued what we see as strong but achievable guidance for high-single-digit revenue growth, modest EBITDA margin expansion, and an approximately 7%-9% increase in free cash flow to roughly $1.9 billion.

After rolling our valuation model forward, we’ve raised our fair value estimate by $10, to $119 per share, primarily due to stronger near-term core operating results, a better-than-expected contribution from US Ecology, and the time value of money.