On Thursday, UBS adjusted its stance on Republic Services (NYSE:RSG), shifting from a Buy to a Neutral rating, despite raising the price target to $195 from the previous $175. The change in rating follows a significant 43% increase in the company's share price over the prior year.
Republic Services is now valued at 14.8 times its estimated 2024 enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA), which is close to UBS's target EV/EBITDA multiple of 14 times for 2025.
The firm noted that Republic Services is nearing multi-year high valuation levels when assessed by both EV/EBITDA and free cash flow yield.
UBS anticipates a slowdown in the adjusted EBITDA per share growth for Republic Services, projecting an increase of 11.5% in 2024 compared to the 15.2% growth experienced between 2022 and 2023. This expected deceleration is partly attributed to a decline in inflation-linked pricing growth.
Despite the downgrade, UBS acknowledged that Republic Services has consistently performed well, with effective execution of mergers and acquisitions (M&A) spending and pricing strategies within the environmental services sector. The company's solid performance record was highlighted as a positive factor.
However, UBS expressed concerns that the combination of slowing growth and full valuations could limit the near-term upside of Republic Services' share price.
Furthermore, the potential for a sector rotation towards higher growth companies or other defensive stocks that are less expensive poses an additional risk. UBS also pointed out that the Municipal Solid Waste (MSW) sector is trading at a price-to-earnings (P/E) premium of 13 times to regulated utilities, which is approximately twice the five-year average.
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