2009 Winter Waste Survey
Healthy Industry Backdrop, Unhealthy Macro 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.
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This report summarizes the results of our most recent semi-annual waste
industry survey.
• Pricing easing, landfill more critical in 09. Respondents expect pricing
to ease this year, though the pullback in fuel is a key factor. With most
independents still relying on core pricing to recover fuel costs, underlying
(base) price trends still appear healthy. The more cyclical business
lines are showing greater stress on pricing. Disposal trends still look
comparatively healthy, and with costs likely easing, could be a key
driver of industry pricing strength in 2009 and beyond.
• Volume weakness broadening across segments & geographies,
trimming estimates a bit further. Not surprisingly, respondents cited
the slowing economy as a source of volume concern, with deceleration
expected across all business lines (including disposal), signaling
downside to volumes in 09. The news was also more geographically
balanced than in recent surveys, when higher-growth markets (such as
the Southeast and West) were much weaker than other parts of the US.
We are trimming estimates a bit on a weaker volume outlook, supported
by the survey results and anecdotal commentary from industry
participants.
• Cost concerns easing on the back of lower commodities. As opposed
to past surveys, cost inflation concerns are abating, which should provide
support for the majors’ margins, but could ultimately threaten pricing.
Labor (the largest cost factor for the majors) regained the top spot among
respondents’ cost concerns, while diesel fuel slipped to 3rd in our semiannual
ranking (the balance of factors preserved their slots). Disposal
costs retained the #2 ranking, affirming our belief that the majors remain
disciplined on that side of the business.
• Waste valuations still appear 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. SRCL, RSG, and
WCN are our top picks.