Republic Services Inc. ARSG

The firm has an exclusive contract with the city of Las Vegas, lasting until 2035. Republic has created a monopoly in the growing Las Vegas region, virtually ensuring years of strong cash flow.

During the last few years, competitors Allied Waste, Waste Management, and Republic have led the way for price increases of 3% on average, contributing to an industrywide shift in positive pricing. With the industry focusing on profitability coupled with consolidation, the stage has been set for further price increases in the future.

Waste haulers have extremely high operating leverage by nature of their fixed-cost structure (in large part because of trucks and landfill operations). If Republic can generate enough waste volume to cover its fixed costs, incremental revenue translates into high margins and profitability.

Republic's earnings could grow substantially if the company is able to pay down the large debt load stemming from the Allied Waste merger. Read more 

Republic's profitability is highly correlated to its ability to pass fuel costs onto its customers. If the company is unable to pass through higher fuel costs, profitability could severely deteriorate.

After the merger, Republic must focus on route optimization to avoid paying higher tipping fees, resulting in a decrease in its internalization rate and margins.

In addition to integration issues, Republic is acquiring a firm with a sizable debt load. Although we're optimistic that Republic and Allied can pay down this debt, the combined firm could struggle, lose its investment-grade rating, and face higher financing costs. Read more