NEW YORK - Surging energy costs and a lack of pricing power are keeping investors hesitant about waste management companies, but analysts believe the industry may exceed expectations this quarter.
Analysts are focusing on operating margins where significant improvements could drive long term growth.
Shares of Waste Industries Inc. (WWIN.O: Quote, Profile, Research) rose almost 6 percent this week, a day after the waste services company reported third-quarter revenue increased 6 percent. Its earnings rose 10.7 percent to 25 cents a share, topping Wall Street's expectations by a penny - a sign of strength in a tough environment.
In the first indication that the quarter might be better- than-expected, Raleigh, North Carolina-based Waste Industries seemed to grow at its margins, despite higher costs this quarter, with operating income up by 6.2 percent.
Earlier this year, Republic Services Inc. (RSG.N: Quote, Profile, Research) , and Waste Management Inc. (WMI.N: Quote, Profile, Research) increased their volume-related revenue estimates, and the group traditionally benefits from cleaning up after hurricanes.
In recent weeks, analysts have been cautiously optimistic on the sector, as the third quarter is typically strong for waste services companies cleaning up summer construction projects.
Stericycle Inc. (SRCL.O: Quote, Profile, Research) may also beat estimates, as it "faces much lower cost pressures than the solid waste names," J.P. Morgan analysts Amanda Tepper and Scott Levine wrote in a research note.
From a long-term perspective, however, rising costs have been throwing the industry into "stagflation" and there is no reason pricing power would improve anytime soon, they added.
Whether hurricanes will have a positive effect, remains to be seen, as rising diesel fuel prices drag down the industry, according to analysts.
"We expect the effect of four hurricanes during the quarter to be the largest variable in our revenue and margin assumptions ... although we believe the bottom line impact will be modest," Longbow Research analyst Brad Coltman wrote in a research note.
The hurricanes were likely to be responsible for some damages in the short term, but benefits would follow due to clean-up and rebuilding efforts in the long term, he added.
Republic Services, Stericycle Inc. (SRCL.O: Quote, Profile, Research) , and Waste Management, are scheduled to report in the next three weeks.
Shares of Waste Industries were up 50 cents at $11.50 in afternoon trading on the New York Stock Exchange.
Story by Emily Chasan
REUTERS NEWS SERVICE
