Bill Gates Gets Further Entrenched in Waste Sector (RSG, WM, MSFT, BRK-A)

If you thought that Bill Gates might have an ambition beyond just passive investing in the garbage and waste disposal sector, you might be correct.  Bill Gates’ Cascade Investment, L.L.C. and the Bill & Melinda Gates Foundation Trust own a collective share of about 15% of Republic Services, Inc. (NYSE: RSG).  Republic is the #2 waste management player now that it acquired Allied Waste Industries behind the dominant Waste Management Inc. (NYSE: WM).

Today came the news that Gates’ confidant Michael Larson has joined Republic’s Board of Directors effective October 28, 2009, and Larson will also become a member of Republic’s Compensation Committee and its Nominating and Corporate Governance Committee.  Larson is the Business Manager of Cascade Investment and is the Chief Investment Officer for the Bill & Melinda Gates Foundation Trust.  In short, Bill Gates (or his investment funds) is not just going to be a mere large investor in the garbage sector.  That is an entrenchment into a company, and there seems to be a reason for it.

What is surprising is that Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A) have not been involved in this investment after reviewing the Buffett holdings as of last quarter.   Republic shares are up about 0.8% today at $26.55 and the 52-week trading range is $15.05 to $28.35. The market cap is now around $10 billion, and the company does pay a dividend of $0.76 (worth some 2.9% yield today).  This also has nothing to do with Gates still having the largest stake in Microsoft Corporation (NASDAQ: MSFT).

One metric we always look for is the earnings and revenue projections from Wall Street.  Thomson Reuters lists $1.46 EPS as the 2009 earnings target and $1.67 EPS for the 2010 earnings target.  Those same annual targets for revenues are listed as $8.26 billion for 2009 and $8.51 billion for 2010.  As always, we are somewhat apprehensive about relying too deeply on analyst consensus data for at least a year after a merger because there can always be surprises on either side of the coin.

Rival Waste Management Inc. (NYSE: WM) posted a 11% drop in profits just yesterday.  Thomson Reuters is calling for growth in 2010 revenues for Waste Management, but that would still be lower than the combined annual revenues for at least each of the last three years.

Gates has been out in front of many major changes with a bit of a futurist investor mentality besides having built a software empire.  He is deeply entrenched with Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A).  He has invested in rail for its huge barriers to entry, he cleaned up in ethanol long before that became a hot sector and subsequent flop, and he invests in other businesses via Cascade.

The garbage sector has very large barriers to entry.  In many ways, the waste management sector is almost the same as a utility.  Many waste disposal companies have partial locks on long-term contracts with municipalities and businesses.  They are highly regulated and new operating permits won’t be handed out haphazardly in most markets.  Garbage and waste producers (like you and me) don’t care who picks up their trash nor where it goes.  The problem creating another barrier to entry is that there are landfill restrictions and most cities and counties do not want to open up new landfills because of the environmental issues and the political heat that comes up each time a new landfill is allowed.  In one sort, it is just like the issue of building a new refinery or a nuclear power plant… nobody wants it in their backyard.

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JON C. OGG