Allied Waste profits plummet
Analysts say stock is still worth holding on to
Barry Cohen

One man’s trash is another man’s treasure.That favorite mantra of flea market regulars could easily apply to companies serving the estimated annual $46 billion U.S. solid waste industry market. 

The second largest trash collector in the country is Scottsdale‑based Allied Waste Industries, Inc., (NYSE:AW), which recorded 2005 sales of $5.7 billion. Last month the company reported its second quarter 2006 profit fell about 30 percent due to refinancing costs and higher fuel expenses.Revenue grew to $1.54 billion from $1.45 billion, according to a company news release.

Despite the earnings drop, a Citigroup securities analyst upgraded the stock to “Buy” from “Hold,” citing the company’s strong second quarter performance and positive pricing trends, an Associated Press article stated.

Allied Waste shares are trading at just more than $10. That’s up nearly 20 percent from a year ago, giving the company a trailing price‑earnings ratio of more than 23. During the past 52 weeks, Allied Waste has traded as high as $14.38. 

The solid waste business, in general, tracks the domestic product, which means volume growth tends to roll along in the single digits, according to an article on the Web site SmartMoney.com.  As a result, the article pointed out, “the companies use pricing and acquisitions to boost growth.”

Pricing and volume growth have driven Allied Waste’s growth during the past six quarters, said Chairman and CEO John Zillmer.

Years ago, Zillmer continued, all three major U.S. waste players–Allied, Waste Management, Inc. and Republic Services–focused on one thing and one thing only–volume. The weapon they used was lower prices, a strategy that hurt all three firms, he added.

Those price‑slashing days are over, Zillmer said.“Like others in the industry, we’re intent on getting a fair return for our services,” he said, adding that the company’s emphasis is now on shareholder return and return on invested capital.

“Today we’d rather walk away from business that isn’t profitable,” he said.

Allied’s network of 304 collection companies provides services to about 10 million customers nationwide. The company serves residential customers underindividual contracts as well as municipal contracts.

In the Valley, Allied Waste has service agreements with Phoenix, Litchfield Park, Buckeye, Superior, and the Salt River Pima Indian Reservation.

Residential trash collection accounts for about 30 percent of Allied’s business, but the 70 percent that is commercial is more profitable, Zillmer said.

“Commercial business is there day in and day out, whether there’s a recession or not,” he explained. “It’s predictable and collections are more frequent.”

Zillmer is now beefing up Allied’s national account business which, he said, hasn’t been significant in the past. Already in the national fold are The Home Depot, Inc. and Best Buy Co., Inc., and the company has a large presence in Wal‑Mart as well, he explained.

Zillmer said that to improve profit margins the company is continually looking for ways to improve productivity and reduce costs. One cost it has little control over is fuel. With a fleet of 12,000 garbage trucks, Allied uses 120 million gallons of diesel fuel a year.

“A one cent increase in the cost of diesel adds about $1.2 million a year to our costs,” he explained. The impact is softened by a fuel recovery fee in about 60 percent of its contracts that allows Allied to pass along increases to customers.

One of Allied Waste’s biggest assets might be Zillmer himself, says Nigel Coe, vice president of equity research for Deutsche Bank Securities, Inc., in New York City.

“He comes from a service background and came in trying to create a service culture at Allied,” said Cole. “He’s viewed as a good operator.”

Zillmer joined the company in May 2005 after 30 years in the managed services industry, most recently at ARAMARK Corp.

Zillmer credited Allied’s turnaround to the new senior managers that have come from outside the industry and a strong internal team.

“It’s a dynamic group, and I’m proud to be leading it,” he said. Zillmer added, “We’re creating a culture of predictability of results that will translate into an increased stock price.”

Reach the reporter at barry@thedesertadvocate.com.