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Waste Lines
2009: A Stiffer Test, A Still-Favorable Outlook
Environmental Services
Scott LevineAC
(1-212) 622-5609
scott.j.levine@jpmorgan.com
Rodney C Clayton, CFA
(1-212) 622-2873
rodney.c.clayton@jpmorgan.com
J.P. Morgan Securities Inc.
See page 25 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies
covered in this report, at no cost to them, where such research is available. Customers can access this independent research at
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This report summarizes our 2009 Waste industry outlook.
• Positive fundamental industry story intact… Continued discipline on
the part of the majors and structural support at the landfill (reinforced by
the recent merger of RSG & AW) should continue to support an overall
positive industry dynamic. Along with a pullback in fuel costs, we
expect pricing to drive margins up again in 09 despite headwinds from
recycling. Although the rollback of fuel surcharges could drive negative
organic top-line growth, we think core pricing (a more accurate driver of
the favorable backdrop in waste) should remain ~50-100bps above the
rate of cost inflation.
• …Though the economy will likely provide a stiffer test in 2009. We
expect another year of weak volumes, with declines approaching 08
levels, driven by a broader set of challenges, including non-residential
construction, permanent roll-off and the commercial business. A housing
bottom could provide some support on the volume front (due to lapping
of easier comps), with recycling providing the greatest swing factor in
the earnings outlook. We’re trimming estimates slightly to reflect weaker
volumes, and we start the year slightly below consensus in most cases.
• Consolidation, recession could drive an active acquisition pace.
Although deal activity often slows during recessions, we think 09 could
be an active year on the acquisition front in waste, with RSG required to
sell assets in fifteen markets, and with the specter of higher capital gains
rates perhaps providing incentive for willing sellers to take action. We
believe those companies with healthy, liquid balance sheets (WCN,
SRCL, WMI) are best positioned to take advantage, while those
companies with refinancing requirements and high leverage will be less
equipped to take advantage of such opportunities.
• Waste valuations still look reasonable. With the group trading toward
the lower end of the historical range, and with industry fundamentals still
healthy, we see upside in several names given reasonable valuations,
defensive characteristics, and earnings upside catalysts. We prefer stable,
defensive names positioned to generate earnings upside via deal
synergies and/or acquisitions. RSG, SRCL, and WCN are our top picks.
We are downgrading WMI and CWST from Overweight to Neutral,
following recent changes in our coverage list.
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