Turning Garbage into +25% Gains

Turning Garbage Into +25% Gains

Published: June 23, 2008

Most Americans hardly give trash collection a second thought until there's an interruption in service. But consider this startling fact: the average American produces 4.6 pounds of garbage each and every day -- that's nearly 1,700 pounds of trash per year, adding up to a total of 251 million tons of trash generated each year in the U.S. alone.

Many forget about all that garbage the second the lid on the trash can snaps closed. But collecting, transporting, incinerating and storing all that waste safely and efficiently is big business -- the North American waste industry alone generates more than $52 billion in annual revenues.

The basic household and office trash we all produce is called municipal solid waste (MSW). Americans' per capita generation of MSW has been relatively stable since the early 1990s. So total waste volumes have been rising at a slow-but-steady pace alongside the growth in the total population. While there are some year-to-year variations in waste production, the garbage industry is relatively immune to economic swings.

Americans don't stop throwing away paper, bottles or disposable diapers just because the economy slows down. That makes the industry largely insulated from the threat of an economic recession and a perfect investment idea for challenging economic times.

So what happens to all of that municipal solid waste once it's generated? The first step is, of course, collection -- the actual transport of waste from individual homes, dumpsters and businesses to transfer facilities or landfills.

In some cases, municipalities handle waste collection directly. But in most cases, individual towns and cities simply contract with a third-party waste management firm to handle collection. Typically, the waste collector charges the municipality or association a pre-set fee based on the volume of trash collected -- contracts are usually negotiated for at least 2 to 3 years in duration.

Once waste is collected, the process gets more complicated. In the U.S., the ultimate fate of MSW can be divided into three basic categories:

Recovery/Recycling
Recycling rates have been gradually trending higher for decades. For example, in 1960 only 6.4% of the total volume of MSW produced in the U.S. was recycled; today that figure is close to one-third of all MSW.

This might seem like bad news for waste disposal firms, but it's not -- most of these firms also collect fees for handling waste recycling. The waste management firm separates out recyclable materials, handles the actual recycling, and then sells those commodities. The firm then pays the municipality a certain percentage of the proceeds from the sale -- this rebate allows municipalities to realize some value from recycling, and it also hands the waste management firm a substantial fee.

Recycling can be a highly lucrative business. For example, over the past five years the prices for all sorts of basic commodities -- including aluminum, glass and steel -- have risen dramatically. Ultimately, that means higher proceeds for recycled commodities.

Waste-to-Energy
This is perhaps the most overlooked destination for garbage, but the basic idea is deceptively simple. Some trash is combustible and can be burned to produce heat. That heat, in turn, can be used to produce steam to drive a turbine and generate electricity.

This process has two main benefits. First, burning garbage reduces the volume of trash that ultimately must be sent to the landfill. Landfill capacity is always limited, so saving space can make a big difference. Secondly, the electricity generated can be sold to local utilities. Typically, waste management firms that convert waste to energy receive a percentage of profits from the sale.

In total, around 12.5% of U.S. MSW is burned to produce energy. That percentage has remained relatively constant for years. But waste-to-energy has gained considerable attention recently due to the rising cost of other key energy commodities such as oil, coal and natural gas.

Landfills
While recycling and waste-to-energy plants are important destinations for MSW, roughly 55% of all trash generated in the U.S. still finds its way to landfills. The total number of landfills in the U.S. has declined from nearly 8,000 in 1988 to around 1,750, but that's mainly a matter of consolidation -- the remaining landfills are, on average, much larger.

Landfills are carefully regulated by the government on the federal, state and local levels. A new landfill site must undergo an extensive permitting and approval process before construction can begin, and even expanding existing facilities takes significant permitting work. In addition to permitting, there are other significant barriers to entry for the landfill business, including the availability of suitable space and the infrastructure needed to maintain a landfill to meet government regulations.

Given the extensive barriers to opening new sites, landfills with spare capacity are among the most valuable assets a waste management firm can own. Firms without access to landfill capacity must pay a "tipping fee" to the landfill owner so firms that collect and store garbage at their own landfills enjoy a significant cost advantage.

+25% Gains in a Recession
All told, the waste management industry is an essential service that sees constant demand -- even in weak economies. Even better, waste managers with access to valuable landfill capacity enjoy a sustainable competitive advantage.

That is why StreetAuthority Market Advisor editor Paul Tracy recently profiled one of his favorite picks in the waste management industry. This market leader holds some of the most valuable landfill properties in the nation. But even better - this company threw off +25% annualized gains during the last recession while the rest of the market languished.

To learn the name of this security, and to view the Market Advisor's "Beat the S&P" Portfolio -- which has outperformed the S&P 500 for five consecutive years -- we invite you to try a no-risk subscription to the Market Advisor. To learn more, please visit this link.

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