Warren Buffett and Bill Gates Bet Big on Republic Services (RSG)

By Cody Goul & Tristan Jih

April 3rd, 2010

Over the last quarter of 2009, billionaire Warren Buffett’s Berkshire Hathaway bought 4,665,500 shares of Republic Services (RSG). This purchase increased the number of RSG shares held by Berkshire Hathaway by 129{3291cb1bf4fd73bca8d404e832e186cbc6f97ddc4c21a45f51320a1dbbde3932}. Over that period, Republic Services traded between $25 and $29 a share.

Currently RSG is trading at $29.51 (3/5/2010).  You should also be aware that Bill Gates’ holding company, Cascade Investments LLC, has been buying large amounts of RSG over the last year. In fact, Gates is currently holding 14.55{3291cb1bf4fd73bca8d404e832e186cbc6f97ddc4c21a45f51320a1dbbde3932} of the shares outstanding.

Knowing Warren Buffett to be a value investor (buying stocks that are trading cheap compared to their cash flow potential).  Buffett made large investments in the stock after Bill Gates piled significant amounts of money into RSG. The average price Warren Buffett paid for RSG stock was around $27 (only $2 cheaper than the stock is trading today).  Knowing previous behavior patterns,  it is no surprise that Buffett’s investment will likely last the next decade or longer.  Buffett and Gates are simply picking up an asset that has attractive value qualities when comparing it to the competition:

Republic Services – RSG                  Waste Management – WM

$29.50/share                                           $33.86/share

Price/Sales Ratio = 1.35                         1.38

Operating Margins = 18.49{3291cb1bf4fd73bca8d404e832e186cbc6f97ddc4c21a45f51320a1dbbde3932}                 17.13{3291cb1bf4fd73bca8d404e832e186cbc6f97ddc4c21a45f51320a1dbbde3932}

Price/Book Ratio = 1.46                          2.59

Book Value = $19.87                                $12.93

With the lower share price, slightly lower P/S Ratio, and stronger operating margins, Republic services looks cheap by trading at a much lower P/B Ratio. If RSG was trading at the same P/B Ratio as Waste Management, RSG would be trading over $50 a share.

Cross Portfolio Outlook: Looking at Berkshire Hathaway’s other holdings, notice how Warren Buffett sold large stakes in oil companies including Exxon Mobil (67{3291cb1bf4fd73bca8d404e832e186cbc6f97ddc4c21a45f51320a1dbbde3932} of shares held) and ConocoPhillips (34{3291cb1bf4fd73bca8d404e832e186cbc6f97ddc4c21a45f51320a1dbbde3932} of shares held). If Buffett’s bet was right, and the price of petroleum goes down, RSG is poised for better operating margins and a stronger ROE.

The Bill & Melinda Gates Foundation also own 15,716,367 shares of Waste Management.

Economic Outlook: Once there is an increase in commercial and residential projects across the nation, RSG will see significant improvement in operating performance. With the stock priced at 1.46 times the book value in this stage of the economy, one can only imagine where it will trade once new construction and remodel projects show signs of advancement.


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