We are downgrading our recommendation on Republic Services (RSG) to Underperform as we do not to see any near-term volume increase in this tough pricing environment.

Republic Services’ first-quarter 2012 adjusted earnings of 38 cents per share missed the Zacks Consensus Estimate of 42 cents. Total revenues increased 0.9% year-over-year to $1.98 billion, lagging behind the Zacks Consensus Estimate of $1.99 billion.

Republic Services expects a 1% increase in pricing and flat volumes to lift revenues by 1% in fiscal 2012. The company had earlier factored in a 1%-1.5% and 0.5% increase in pricing and volumes, respectively, in its revenue guidance. Adjusted earnings are projected to lie between $1.86 and $1.90 per share in fiscal 2012, down from the previous range of $1.98-$2.02.

Republic Services is facing stiff competition from companies like Waste Management (WM) and privately held Waste Industries USA, Inc. It has lost four contracts during the quarter to its peers.

The company is implementing price increases to offset the higher costs for improving its operating margin. But Republic Services may still face a challenging situation if its competitors choose to reduce their prices in an effort to expand their market shares.

We expect that volumes will remain flat year-over-year in the second quarter on account of the contracts lost during the first quarter. A difficult pricing environment coupled with constrained volumes is expected to weigh on the company’s margins.

Moreover, the ever increasing fuel cost proves to be a challenge for the company. Fuel expenses soared 60 basis points as the average price of fuel per gallon jumped 2.6% sequentially and 9% year-over-year in the first quarter. The company, therefore, is likely to face headwinds if fuel price remains at the current level.

Republic Services has been investing significantly to enhance its capability in the recyclying centres. During the first quarter, the company opened a centre at Anaheim, California, increasing its capacity by 50,000 tons in that market per year.

During first quarter, Republic Services completed acquisitions worth $65 million. These acquisitions are considered to be highly accretive and would prove beneficial for the company over the long run.

Our long-term recommendation is in line with the short-term Zacks #5 Rank (Strong Sell).

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