Our goal in this paper is to understand the domestic Waste Management space and crystalize a perspective on investable trends and companies. More specifically, we provide the backstory to key trends and link these trends to underlying companies poised to benefit. At the end of the article, we segment the different classes of players to help as a reference when reading. We hope this will be useful for the investor seeking to advance their knowledge of the Waste Management space while developing perspectives on potential investment opportunities.
Privatization & Consolidation
According to the Waste Business Journal, the U.S. waste and recycling industry generates about $75 billion in annual revenue. Overall, roughly 80% of that revenue is generated from the private industry while the rest comes from the public sector. Although some cities may choose to have more control and ownership over aspects of waste management, a vast majority of cities contract almost all functions of waste management to private entities. This generally leads to reduced costs on the side of municipalities and increased efficiency. Cities negotiate contracts and can impose restrictions on any company that is involved in the collection, disposition, recycling, or composting of waste. This is in large part why a sizeable degree of fragmentation remains in the space. Scaling a large waste management business while meeting all the varied regulatory requirements imposed across a multitude of municipalities is no easy task. Because of this challenge, when assessing expansion plans across municipalities or states companies have opted more for the M&A route instead of organic sprawl-type expansion. It is easier to acquire a company that is already getting the job done in the target municipality than building it from scratch. This is evidence by the data. The largest firm in the space, Wealth Management (WM), has averaged roughly 10 deals a year over the past decade with an average deal size of roughly 200mm. Acquisitions targets include waste haulers, landfill operators, and MRFs (Recycling facilities formally known as Material Recovery Facilities). Although there remains a healthy amount of fragmentation, consolidation has been consistent for the past three decades. Vertically integrated players have been steadily acquiring landfills, MRFs, and waste haulers and using this integration to undercut their horizontal competition.
Rise of Recycling and Persistence of Landfilling
The rise of recycling was marked by the advent of Earth Day in 1970. The public was clamoring to do something to combat the harm caused to the environment by the mass production of disposable goods and increased generation of carbon emissions. Although still highly imperfect, recycling was society’s answer to the problem. Consumers started to become educated on the benefits of recycling and the ills of harmful methane gas production and groundwater contamination caused by landfilling. With the rise of single-stream recycling beginning in the early 2000s (disposing of all recyclables into a single bin instead of multiple bins to have sorted at a “clean” MRF) and mixed waste recycling (disposing of all waste including recyclables into a single bin to have sorted at a “dirty” MRF), the industry found a way to increase recycling rates by making it more convenient for consumers. All this assisted in rapidly increasing the proportion of waste recycled (Figure 1). Large waste management players did not remain idle in the face of this change and began purchasing and building recycling facilities (MRFs).
Today Waste Management (NYSE:WM) for example, owns roughly half the MRFs in the United States. Recycling trends continue and some cities have even set targets in the future to achieve 100% diversion from landfills and incinerators (aka “Zero Waste”). This would mean all organic waste is composted and 100% of the rest of the trash is recycled. Sadly, we are very distant from achieving anything close to this goal even with pressure from the EPA and local and state governments to restrict certain trash from being dumped in landfills. Looking at figure 1, it is clear that although the % of waste going to landfills has declined over time, the amount of waste going to landfills continues to persist. In a world of disposable consumption where per capita trash volume continues to rise, landfills are a necessary evil and an increasingly scarce one at that. It is safe to say that domestically, the supply of landfills is heavily restricted and that building a new landfill takes nothing short of an act of congress. NIMBY is in full effect. Figure 2 shows tipping fees (fees charged to dump at landfills) continuing to climb north as a result of this supply and demand imbalance. Because supply is so restricted, owning the only landfill in town is a huge competitive advantage that can be leveraged to drive out the competition if owned by vertically integrated players. They can charge other haulers for dumping their trash (“tipping fees”) and effectively drive out the competition by charging collection fees that are lower than the market. Competition in multiple municipalities has tried to take legal action, citing anti-trust legislation but this has led nowhere, and tipping fees continue to increase and horizontal competition continues to give way to vertically integrated players. Competitors have to be creative. Some players have carved out a niche by focusing on the more hazardous waste that takes extra care and effort to dispose of. It is clear that for competition to survive, they cannot compete solely on price and must differentiate.
Contamination Rates and the Rise of China
Assisted by single and mixed stream recycling, recycling rates increased substantially but a new problem was introduced: namely, contamination rates were on the rise. As it turns out, throwing all recyclables into a single container makes it more difficult to separate and clean. The problem is even more challenging when the waste is mixed. Recycling done properly works well and the commodity output generated can be quite valuable however the investment required to sort and clean can offset any rewards. High contamination rates are a large problem and the main …