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Republic Services (RSG) Q1 Earnings: A Surprise in Store?

Premier waste management firm Republic Services, Inc. RSG is scheduled to report first-quarter 2016 results, after the closing bell on Apr 28.

Last quarter, the company posted a decent positive surprise of 2.0%. Notably, for the trailing four quarters, the stock posted an average positive surprise of approximately 4.8%.

Factors to Consider

Republic Services’ well structured business model has proved to be its strength, having driven volumes, earnings, free cash flow, return on invested capital and cash returns to shareholders over a significant period of time. Meanwhile, the company has made commendable progress with its multi-year strategic initiatives which is expected to reduce costs. Republic Services’ cost structure is closely aligned to its “waste indices” which in turn has also proved to be a major positive.  

In addition, the company’s acquisition of environmental waste solutions firm Tervita in Feb 2015 has reaped considerable benefits. As a matter of fact, Republic Services’ acquisitions in 2015 contributed approximately $143 million to revenues in the year and are expected to boost the top line in the to-be-reported quarter as well. Moreover, the company’s “capture cloud-based pricing tool” has benefitted results over the past few quarters.

Also, increasing customer engagement on the digital platform may act as a growth catalyst for the first quarter. Republic Services announced the addition of approximately 1.2 million customers in its customer portal and mobile app My Resource in fourth-quarter 2015. Also during the quarter, the company launched “click-to-buy capabilities” for approximately 50% of residential subscription markets. Given the evolving needs of customers’ buying preferences, Republic Services expects solid market traction of its latest offering that will likely be conducive to growth.   

Despite these positives, Republic Services’ recycling operations process certain recyclable materials for sale including, fibers, aluminum and glass, all of which are subject to significant price fluctuations. In addition, the slump in oil and gas prices along with the decrease in recycled commodity prices have proved to be a major drag on in the fourth quarter of 2015 and continues to threaten the company’s first-quarter 2016 results.

Also, the company expects a high effective tax rate which may hurt its financials.

Earnings Whispers

Our proven model does not conclusively show that Republic Services is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) and #3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP for Republic Services is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 47 cents.

Zacks Rank: Republic Services currently carries a Zacks Rank #2 which when combined with a 0.00% ESP makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revision.

Stocks That Warrant a Look

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Boyd Gaming Corporation BYD, earnings ESP of +36.00% and a Zacks Rank #1.

Anixter International Inc. AXE, earnings ESP of +4.94% and a Zacks Rank #1.

Arch Capital Group Ltd. ACGL, earnings ESP of +1.77% and a Zacks Rank #2.

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