Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Enterprising Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Republic Services Inc. (RSG) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Republic Services, Inc. (Republic) is a provider of services in the domestic non-hazardous solid waste industry. Republic provides non-hazardous solid waste collection services for commercial, industrial, municipal and residential customers through 334 collection operations in 39 states and Puerto Rico. The Company owns or operates 194 transfer stations, 191 active solid waste landfills and 74 materials recovery facilities. It also operates 69 landfill gas and renewable energy projects. The Company operates in four geographical segments: Eastern, Midwestern, Southern and Western. Its residential collection operations involve the curbside collection of refuse from small containers into collection vehicles for transport to transfer stations or directly to landfills. Its commercial and industrial collection operations supply the customers with waste containers of varying sizes.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$24.33|
|Value Based on 0% Growth||$14.26|
|Market Implied Growth Rate||7.40%|
|Net Current Asset Value (NCAV)||-$30.37|
Balance Sheet – 6/30/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Republic Services is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor has concerns with the level of earnings growth over the last ten years, the low current ratio, and the high PEmg ratio. The Enterprising Investor is concerned with the high level of debt relative to the current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.15 in 2010 to an estimated $1.68 for 2014. This level of demonstrated growth supports the market’s implied estimate of 7.40% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Republic Services Inc. (RSG)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Republic Services Inc. (RSG) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.