Garbage was the quintessential commodity business until a young McKinsey consultant figured out how Republic Services could turn itself into a profit machine by pricing all kinds of junk at full price. He is now CEO of the overperforming junk food giant.
Inthe Sheep Mountains just north of Las Vegas, the Apex landfill receives 8,000 tons of trash a day, delivered by 280 trucks that leave the freeway before taking a winding dirt road to what is called the coal face – an active 3-acre area where oversized bulldozers with spiked metal wheels crush and compact waste. The heap is already 500 feet deep in some places, but there’s enough room left to continue burying Sin City’s trash for centuries to come. Its owner, garbage giant Republic Services, has a 15-year monopoly contract to collect trash and recyclables from across the Las Vegas area.
“We prefer to call it a franchise,” says CEO Jon Vander Ark, 47, who donates 5% of contract revenue (which is about $250 million a year) to Las Vegas County in exchange for an exclusivity.
Republic hauls around 28 tons a day of buffet and other leftover food from hotels and casinos to a farm adjacent to the Apex dump, where it’s boiled into a yellow-brown stew swallowed by 3,500 pigs. Other organic matter rots over time and releases methane, euphemistically called “landfill gas,” which Republic captures and sells at a premium to industrial users. Meanwhile, a mining company pays Republic a royalty on the 150 truckloads a day of pulverized mountain rock it hauls offsite to make room for more incoming loads of trash. The removed rock is mixed into concrete for Vegas sidewalks. Next up: a new regional “polymer hub” to take advantage of food and beverage manufacturers’ willingness to pay more for high-quality recycled plastic than for virgin materials.
Phoenix-based Republic operates 198 landfills, 71 recycling centers and collection lanes in 41 states. After a declining pandemic in 2020, volumes recovered in 2021, helping it post a 17% increase in net profit to $1.3 billion on sales of $11.3 billion. Its stock, which trades around $131, is down just 10% from its 2021 peak, compared to an 18% decline in the S&P 500.
Vander Ark’s secret? Fully embrace the concept that in one’s business, garbage is an asset and should be charged at a high price. “Waste is worth so much more than we thought,” he exults. Well, more than most people thought, anyway. Even in 2009, when he began advising Republic as a young McKinsey consultant with a Harvard law degree, Vander Ark saw the pricing power of trash. “The pandemic has underscored that the only thing we control is price. We do not control volume and we do not create demand.
“I’m cynical about hiring consultants from McKinsey,” says Michael Hoffman, managing director of Stifel Investments in Baltimore, which has tracked the garbage industry since 2008. “But Jon brought something they didn’t. would not have understood. Industrial Waste has never rated assets as scarce. Routes never maximized.
Early on, the young consultant convinced then-CEO Don Slager that Republic wasn’t charging independent waste haulers high enough “tipping fees” to dump their loads at Republic-owned landfills. The marginal cost of adding a few more tons of waste to a landfill seemed deceptively low because it did not include the high expense of opening new landfills. Essentially, Republic was selling its future earnings too cheaply.
Vander Ark argued that Republic should significantly increase its fees. Operators who could not afford it would go elsewhere. Those who could pay identified themselves as profitable enough to become targets for Republic acquisition. It wasn’t until 2019, Hoffman says, that Houston-based archrival Waste Management (2021 sales: $18 billion) caught up with Republic’s aggressive landfill pricing.
HOW TO PLAY
By John Dobosz
Betting on society to keep producing garbage seems like a safe bet – and unless we go back to dumping our trash on the streets, garbage trucks have a safe future. Heil Environmental Industries has been one of the world’s largest manufacturers of specialty sanitation vehicles since 1901. Workers at its Fort Payne, Alabama plant weld several tons of steel and machinery onto truck frames and deploy the custom compacting parts and hauling equipment to waste haulers around the world. If you want a piece of Heil, you’ll have to buy shares of Dover Corp., the Illinois-based mini-conglomerate that bought the garbage truck business in 1993. It’s also a major player in pumps, winches, hoists, commercial refrigerators and auto repair equipment. Revenue this year is expected to rise 8.3% to $8.6 billion, with profits up 11%. Valued at 15 times earnings, Dover is trading at a 22% discount to its five-year average P/E, and its dividend yield is 1.6%.
John Dobosz is editor of the Forbes Dividend Investor and Forbes Premium Income Report investment newsletters.
Waste Management and Republic (nos 1 and 2 when it comes to trash) both descended from billionaire Wayne Huizenga, who died in 2018. He started out hanging from the back of a garbage truck, then acquired hundreds of competitors before making Waste Management public. in 1971. He left that company in 1984 and repeated his play with Blockbuster Video and AutoNation. Republic was spun off from AutoNation in 1999.
When Vander Ark hit the scene a decade later, Republic still hadn’t moved beyond its coiled roots. It operated under dozens of names (from Duncan Disposal to Trash Taxi) and had not standardized truck maintenance or fleet operations. “You don’t have to fix a truck 165 different ways; there should be a way to do it. Availability is synonymous with profitability. You have to have a rolling fleet,” says Vander Ark, who will even fly mechanics across the country to keep the trucks moving.
Vander Ark’s approach to growth and profit is exemplified by Republic’s $2.2 billion acquisition of US Ecology, which has a 36% market share in hazardous waste disposal, with five landfills that bury low-level chemical, medical and nuclear products. waste. He did not hesitate to pay a 70% premium on the share price before the transaction for a company whose operating margins are lower than those of Republic. Indeed, with hazardous waste volumes growing faster than normal waste and opening new hazardous waste facilities almost impossible, he will have the power to raise prices and increase margins.
Despite these investments, Republic pays regular dividends; its largest shareholder, Cascade Investments (personal holding company of Microsoft co-founder Bill Gates), receives more than $200 million a year in dividends from its 34% stake. Hoffman thinks it’s a good way to diversify for Gates. “Remember we are talking about waste,” he says. “It’s capital-intensive and it’s not growing at 20% a year like software, but for the big players it’s become an extraordinarily repeatable and inflation-proof business.”