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Republic Services set to continue growth

I remain upbeat about the shares of Republic Services, the second largest non-hazardous solid waste company in the US. Recently, the company issued decent financials for the first quarter of 2016. Revenues increased 3.7% y-o-y to $2.25 bn, mostly in line with consensus estimate. The improvement was driven by a 2% rise in average yield and a 2.5% increase in volume, partially offset by lower fuel recovery fees of 1.4% and lesser recycling commodity revenues of 0.1%. Core price increased revenues by 3.4% during the quarter. Adjusted EBITDA came in at $626 mn (27.8% of revenues) compared with $625.9 mn (28.8% of revenues) in the year-ago quarter. Adjusted earnings per share declined 2% to 48 cents but exceeded analysts’ average projection by a penny.

In Q1, Republic Services returned about $191 mn to its shareholders. The company repurchased 1.9 mn shares for $86.8 mn and paid a 30 cents per share dividend, which offers a healthy annualized dividend yield of around 2.5%.

During the reported quarter, Republic Services realigned its field support functions by combining two organizational layers into one. The company eliminated 3 Regions, consolidated 20 Areas into 10 and streamlined select roles at its Phoenix Headquarters. Republic Services aims to reinvest and deploy resources into its Area levels through the creation of 10 Area Offices with enhanced workforce. The company will also consolidate its call center operations. Republic Services intends to invest approximately $20 mn in 2016 to design and implement its Customer Resource Centers and other customer-focused initiatives, and expects them to contribute approximately $10 mn of annual cost savings from 2018. In addition, the company anticipates annual cost savings of approximately $25 mn from the organizational realignment.

With diligent execution of operational plans and a realigned operational structure, Republic Services is likely to generate a healthy cash flow in the future. The company, we believe, has strong underlying fundamentals and is set to achieve consistent earnings growth while creating significant shareholder value.

I expect shares of Republic Services to continue growth, with medium-term target at $52.