Good writeup Marathon, the company has a very strong track record. Apologies if I didn't quite pick it up through the report, but wondering about your view of margins. For what appears to be a very steady earner, EBITDA margins have moved around quite a lot. What do you put the decline to over the last decade and what are you basing the recovery of margins on in your forecasts?
Thanks Luke. That's a fair point and is indeed one area that I would want to investigate further (as you can see in the appendix/further areas for research).
My suspicion is that acquired targets are initially dilutive to margin and then over time efficiencies are captured and improve.
Also the large Progressive merger of 2016 is likely to have taken margins down meaningfully, so I would compare current margins to post 2016.
But you are right it certainly remains an area that requires further work/research.
Good writeup. Throwing it on my list of names to dig deeper into. Roughly, seems hard to like it at current multiples -- but need to understand it better.
Thanks Devin. I agree with you, the multiple is indeed quite high.
However, the value of the landfill network is truly exceptional and very hard to replicate. So I feel the risk of terminal multiple impairment is very low. So over time the growth compounding of FCF/share should overtake the high starting multiple in my opinion.
This is the type of company I like (and I have exposure to several that you compd it to) -- I just generally look for things I can model to be more conservatively mismatched between price and forward expected returns; not because they aren't great businesses, but because I'm compelled to further discount my own ability in assessing them.
"While municipalities tend to stay either open or franchised, they can switch from one to the other on occasion. Recently, Cass has seen several market shifts which have had significant impacts on companies. On July 1st, 2016, the State of Arizona enacted SB 1079. This state law precluded any municipality from enacting franchise rates and services on multi-family communities. This opened the market up for these particular customers. Many, although not all, saw decreases of 15-25% in their waste spend when they were able to procure service agreements from competitive haulers in the market.
On the flip side of this, beginning on January 1st, 2017 the City of Los Angeles began implementing enforcement of Ordinance No. 182986. This changed the market from open to a franchised waste system. The City began this process in the attempt of complying with California’s AB 939 and AB 341 which aims at reducing to zero waste to landfills.
In accordance with this ordinance, all customers were immediately required to have recycling capacity at least equal to what their trash capacity is. Under the ordinance, recycling charges are free no matter how much recycling service you have. However, regular trash bills increased anywhere from 100% - 300% over what they were paying before the franchise system was enacted. This has caused issues not only with companies attempting to bring their recycling services up to code, but it has also had significant impacts on budgets."
Good writeup Marathon, the company has a very strong track record. Apologies if I didn't quite pick it up through the report, but wondering about your view of margins. For what appears to be a very steady earner, EBITDA margins have moved around quite a lot. What do you put the decline to over the last decade and what are you basing the recovery of margins on in your forecasts?
Thanks Luke. That's a fair point and is indeed one area that I would want to investigate further (as you can see in the appendix/further areas for research).
My suspicion is that acquired targets are initially dilutive to margin and then over time efficiencies are captured and improve.
Also the large Progressive merger of 2016 is likely to have taken margins down meaningfully, so I would compare current margins to post 2016.
But you are right it certainly remains an area that requires further work/research.
Good writeup. Throwing it on my list of names to dig deeper into. Roughly, seems hard to like it at current multiples -- but need to understand it better.
Thanks Devin. I agree with you, the multiple is indeed quite high.
However, the value of the landfill network is truly exceptional and very hard to replicate. So I feel the risk of terminal multiple impairment is very low. So over time the growth compounding of FCF/share should overtake the high starting multiple in my opinion.
This is the type of company I like (and I have exposure to several that you compd it to) -- I just generally look for things I can model to be more conservatively mismatched between price and forward expected returns; not because they aren't great businesses, but because I'm compelled to further discount my own ability in assessing them.
That's very sensible - probably a very good way to protect downside risk/capital.
Q. If franchise markets increases the prices, why isn’t there more competition in this field as compared to open markets where negotiations and competitiveness can bring prices down? According to this article https://www.cassinfo.com/waste-expense-management/waste-and-recycling-blog/what-is-the-difference-between-franchised-vs.-open-market-waste-services
Ill state the comment from article below
"While municipalities tend to stay either open or franchised, they can switch from one to the other on occasion. Recently, Cass has seen several market shifts which have had significant impacts on companies. On July 1st, 2016, the State of Arizona enacted SB 1079. This state law precluded any municipality from enacting franchise rates and services on multi-family communities. This opened the market up for these particular customers. Many, although not all, saw decreases of 15-25% in their waste spend when they were able to procure service agreements from competitive haulers in the market.
On the flip side of this, beginning on January 1st, 2017 the City of Los Angeles began implementing enforcement of Ordinance No. 182986. This changed the market from open to a franchised waste system. The City began this process in the attempt of complying with California’s AB 939 and AB 341 which aims at reducing to zero waste to landfills.
In accordance with this ordinance, all customers were immediately required to have recycling capacity at least equal to what their trash capacity is. Under the ordinance, recycling charges are free no matter how much recycling service you have. However, regular trash bills increased anywhere from 100% - 300% over what they were paying before the franchise system was enacted. This has caused issues not only with companies attempting to bring their recycling services up to code, but it has also had significant impacts on budgets."