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Airspace Is the Advantage in Waste Disposal

The moats can be found in landfills.

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Large garbage trucks driving neighborhood routes are usually the most visible aspect of the waste disposal industry. However, the true value of this business resides in the ownership of landfills, in our opinion. Possessing an ample inventory of airspace to dump trash is a premium advantage that allows a landfill owner to reap outsize returns. Republic Services (RSG), Waste Connections (WCN), and Waste Management (WM) own a significant amount of U.S. landfill space, and this provides them with stalwart narrow economic moats. As regulatory barriers to entry constrain available landfill capacity and protect against competition, we believe landfill owners will be able to leverage their assets into robust results over the long term.

These large landfill owners deploy the unique aspects of their assets to sustain outsize returns despite the inherent constraints of a capital-intensive operational structure. With the ability to control pricing and leverage assets to drive profit expansion, we believe landfill ownership continues to be the key driver of outsize economic profit in the U.S. waste industry. Even though the shares of these major waste players are trading mainly in line with our fair value estimates, we believe a price pullback could offer an advantageous opportunity to investors.

Barbara Noverini does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.