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Shares of Republic Services to reach $50 in medium term

I remain upbeat about the shares of Republic Services, the second largest non-hazardous solid waste company in the US. Recently, the company announced that it had expanded its fleet of compressed natural gas (CNG) solid waste collection trucks with the addition of 62 such trucks in Broward and Dade counties. These new CNG trucks will replace the previously used diesel-powered collection trucks. This initiative by the company will accelerate the total number of natural gas vehicles operating in South Florida to 127.

Pollution is a growing concern in today’s world, and keeping that in mind, the company has been taking initiatives to reduce carbon emission. CNG emits lower levels of pollutants than diesel in every aspect. Derived from waste material, CNG’s net emission is zero. In fact, renewable natural gas offers a 72-97% well to wheels emission reduction in greenhouse gases as compared to diesel. In the US, Republic Services operates approximately 2,500 CNG vehicles and 38 natural gas fueling stations. The company’s CNG-powered fleet helps save around 18 mn gallons of diesel fuel annually.

Furthermore, on an energy equivalent basis, natural gas is also less expensive than oil. Despite the sharp fall in crude prices, natural gas maintains its cost advantage. So, the conversion of its diesel vehicles to CNG will help the company reduce operational cost, thus improving margins.

Republic Services’ financials for the fourth quarter of 2015 were solid, with revenue growth of 2.7% y-o-y outpacing the industry average of 1.1%. For full-year 2015, revenues grew 3.5%. With this solid finish to the year the company also exceeded its full-year guidance for earnings per share and adjusted cash flow. To note, the company returned nearly all of that cash back to investors, with $808 mn going toward buybacks and dividends. A quarterly dividend was 30 cents per share, which offers a healthy annualized dividend yield of 2.6%.

Republic Services plans to issue its first-quarter 2016 financials on April 28, and I expect that the company will be able to positively surprise investors.

In my opinion, shares of Republic Services have good chance to resume growth, with medium-term target at $50.