The Garbage Business
If you wake up really early like I do, you’ll discover parts of the underbelly of capitalism. For one thing, you’ll notice all the big trucks on the freeway delivering goods to retail locations ahead of the business day. For example, if you happen to be in a parking lot outside of a restaurant or grocery store, you’ll see truck drivers unloading fresh food and groceries. The other thing you’ll notice is garbage trucks speeding around collecting trash. Capitalism produces a lot of trash and it has to go somewhere. We don’t normally think about this but the garbage companies perform an essential service just as important as the electric utilities or the cell phone companies.
The three leading publicly traded garbage stocks are Waste Management (WM), Republic Services (RSG) and Waste Connections (WCN) – and they’re great businesses. They perform essential services like electric utilities and cell phone companies, as mentioned above, and they’re also monopolies in their local markets as well. While garbage might not be as sexy as Nvidia and Artificial Intelligence, 30% trailing 12-month returns are sexy enough if you ask me.
There’s more to the garbage business than meets the eye. The garbage companies collect trash from residential, business and government accounts for which they receive a service fee. They bring that trash to their landfills. But you can’t put just anything in your trash. Some things are too big or hazardous. To dispose of them, you have to take them to the landfills where the garbage companies charge you a fee to dispose of them. That’s another source of revenue. In addition, recycling is becoming an important part of the trash business. The garbage companies mine their garbage for recyclable materials which they process and sell. For instance, WM had $405 million in Net Revenue from Recycling Processing and Sales in the 2Q24. That was 7.5% of their Net Revenue for the quarter – and that part of the business is growing rapidly.
The garbage companies make a lot of money. WM – which reports 3Q earnings after the close Monday – is guiding 2024 Adjusted EBITDA to ~$6.5 billion. RSG – which reports 3Q earnings after the close Tuesday – is guiding 2024 Adjusted EBITDA to nearly $5 billion. The number for WCN – which reported 3Q earnings after the close last Wednesday – is nearly $3 billion. As a multiple of Adjusted EBITDA, these stocks trade in the low to mid teens. They’re not especially cheap but you have to pay up a little for the reliability and quality of earnings.
It is a cliche of personal finance that the way to get rich is to make money in your sleep. If you own the garbage stocks, you can sleep soundly knowing that garbage trucks are speeding around in the middle of the night collecting everybody’s trash.
