What Investors Need to Know About the Advanced Disposal Services IPO

By Markets Fool.com

Does the stock market need another waste disposal stock? After all, the industry is dominated by a powerful incumbent, Waste Management (NYSE: WM), while investors can also buy shares of peers likeWaste Connections (NYSE: WCN),Republic Services (NYSE: RSG), and Clean Harbors (NYSE: CLH).

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Image source: Advanced Disposal Services.

Regional competitor Advanced Disposal Services clearly thinks so, as it's about to launch its IPO after delaying it earlier this year. Here's a brief look at the soon-to-be-listed company.

One man's trash is another's...

Advanced Disposal advertises itself as the fourth-largest solid waste carter in the US.In contrast to some of its larger peers, which have operations throughout the country, Advanced Disposal generally concentrates on the Midwest and the South.

As of the end of this past June, almost three-quarters of its revenue was from those two regions; the remainder came from the Eastern US. All told it had around 2.8 residential customers, and 221,000 commercial and industrial clients. On its asset list were 39 owned or operated landfills, and 21 recycling facilities.

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Advanced Disposal focuses its efforts on what it characterizes as "secondary, or less densely populated non-urban, markets where the presence of large national providers is generally more limited."

That's a sensible approach, but it hasn't been a profitable one lately. Advanced Disposal has booked net losses in at least the past five fiscal years.

A big acquisition -- Veolia ES Solid Waste in 2012 -- didn't stem the red ink. And in the three fiscal years that the company has been included in its parent's results, total revenue hasn't popped (the figures from 2013 to 2015 were $1.32 billion, slightly over $1.40 billion, and just under $1.40 billion, respectively).

Revenue struggles have been the norm in the waste disposal sector lately, due in no small part to depressed commodity prices.Cheaper oil makes it more cost-effective to buy virgin plastic as opposed to the recycled variety. Low oil prices also help pump up the value of the dollar, making American recyclables noncompetitive in foreign markets.Most big waste hauling companies offer recycling services to some degree.

That aside, it remains a generally profitable industry. Over its past five fiscal years, Waste Management has not posted a single net loss; ditto for Republic Services. Clean Harbors and Waste Connections have each booked only one loss-making period across that stretch of time.

This Fool's take

One big reason for Advanced Disposal's shortfalls is the company's high indebtedness. At the end of this past June, its borrowing stood at over $2.2 billion, a figure well higher than the annual revenue tallies it's been reporting lately.

As a result, interest expense is considerable. Last year, it amounted to $138 million, or almost 10% of revenue. By comparison, in their last-reported fiscal years the figures for Waste Management and Waste Connections were both just shy of 3%. Republic Services stood at 4%, and Clean Harbors' was just over 2%.

Meanwhile, three of those Advanced Disposal rivals -- Waste Management, Waste Connections, and Republic Services -- pay dividends, with current yields of 2.6%, 0.8%, and 2.5%, respectively.

Don't expect a payout from the new company; in its prospectus, Advanced Disposal bluntly admits that it has "no current plans" to distribute one.

So Advanced Disposal is a company that's struggling like its peers, but has significantly more leverage, and a much harder time squeezing out a profit. It also won't be paying a dividend for quite some time at least.

Considering all that, it doesn't seem like it'll be a choice investment in the sector, at least not now.

The details

Advanced Disposal Services is slated to make its stock market debut this Thursday (Oct. 6) on the New York Stock Exchange under the ticker symbol ADSW. 19.25 million shares are to be sold in the IPO at a price of $18 to $21 apiece.

The lead joint book-running managers of the issue are Deutsche BankSecurities, Credit Suisse Securities, and BarclaysCapital.

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Eric Volkman has no position in any stocks mentioned. The Motley Fool owns shares of Clean Harbors and Waste Management, and recommends Republic Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.