Barron's Streetwise - Deep Dive on Garbage

Episode Date: July 18, 2025

Plus, why CVS prefers the second-best weight loss drug.  Learn more about your ad choices. Visit megaphone.fm/adchoices

The main pushback we get from investors on these names when we recommend them is usually just the valuations are high. You don't tend to see that many really obvious attractive entry points. So whenever you get a pullback like this, it tends to be a pretty good buying opportunity. Hello and welcome to the Baron Streetwise podcast. I'm Jack Howe. The voice you just heard, that's Trevor Romeo. He's an analyst covering waste and recycling at William Blair. This week's episode is all about garbage. Isn't that every week I hear you thinking? No, and that's very hurtful.

We're going to talk about landfills and margins and recycling, all of it. First, we'll have a few words to say about the latest on obesity meds. That's next. on obesity meds. That's next. Listening in is our audio producer, Alexis. Hi, Alexis. Hey, Jack. Late July in New York City, you're in New York City.

I lived there for many, many years. What is the, what's the trash situation like? Because when I was there, what used to happen, this was like garbage season this time of year, because in New York, they piled the bags sometimes like right on the sidewalk and the pile can get pretty high at certain times of the week. And in the hot months, in the hot months, you can get,

you know, you can- Thrust a stink. A little bit, sometimes depending where you are, sometimes you see a little river of garbage juice on the side of the street. There's all kinds of wacky things going on. I mean, I know you want, sometimes you see a little river of garbage juice on the side of the street. There's all kinds of wacky things going on. I mean, I know you want me to say that nothing has changed since you've lived here, but-

It's gotten better. It's gotten better because of the rat czar. Okay, and there's a bunch of rules about how we have to do things so that we don't get rats. I see. So there's no more big piles? Well, I wouldn't say no more. I once saved a woman's life.

Well, not quite, but we were walking down the sidewalk. And this was in midtown Manhattan and we were chatting and she was not looking in the right direction and she almost walked into a big pile of garbage. And I grabbed her arm at the last minute before she fell into a pile of garbage. That's not that's that's saving a life, right? Yeah, if not her life, her dignity. All right, we're going to come to Trash in a minute. It's a very important business. There's a few key players that have a lot of market share,

and there's a reason to believe that this business is going to become more profitable in the years ahead. I want to say a few words first about another July non-garbage development. This one is at CVS, the drug chain, and it has to do with obesity drugs and a formulary change. We've spoken many times in this podcast about obesity drugs. We've had the chief of Eli Lilly on about CVS. We've had the former CEO there on CVS owns what's called a pharmacy benefits manager called Caremark and PBMs as

they're called they do business with health plans and large employers. They basically manage drug benefits and Caremark has made the decision to change its formulary. It's now preferring Wegovi, the weight loss drug from Novo Nordisk. The key competing drug is called ZepBound. That one's from Eli Lilly. It means that for patients whose plans deal with this PBM, many of them will have coverage for Wegovi, but not for ZepBound. And I think that's an important and telling development. I just want to mention what it means for investors.

And I think that's an important and telling development. I just want to mention what it means for investors for everyone who's not familiar with these drugs. I'm really not that guy to explain to you how they work. I've tried to figure it out myself. What I can tell you is they really work. These drugs were made first for diabetes and approved there. Now they've been approved for obesity. They're called glp one agonists. That refers to a particular hormone that's secreted in the gut after you eat. And these drugs can sort of mimic the action of that hormone. Novo Nordisk had a head start here. They have a drug that deals with GLP-1 specifically. Eli Lilly came behind them with a dual agonist drug. It deals with that hormone and another one. Ozempic is the first one people heard of and that's become sort

of a catch-all name for these type of drugs. Ozempic was specifically marketed for diabetes. When that same underlying drug was approved for obesity it was called Wegovi. So those two are the Novo drugs, the lily drugs, the diabetes one was called Manjaro. And now when it's marketed for obesity, it's called ZEP bound. I know it's super confusing, but the key thing to keep in mind is that Lily, because that drug was the dual agonist drug works in two ways. It was designed to be more effective.

And studies have really borne that out. There was a December study that pitted these two drugs for weight loss head to head and the ZEP bound patients the patients on the Lily drug. They lost 20.2% of their body weight and the we go V patients the ones in the novo drug. They lost 13.7% so that is a big difference in terms of weight loss.

That's not the maximum weight loss. That's not what everyone loses. That just gives you an idea of how these two drugs compare. And patients seem to be well aware of this because everyone is preferring Zep Bound. Well, not everyone everyone, but Zep Bound has now a 60% market share and that includes 75% of treatment starts. I think that's reflected in what has been going on

with the stocks over the past year. Novo Nordis stock has lost half its value. Lily is down to it's down 9%. The S&P 500 during that time is up 14%. Now both of these stocks are still up for longer term holders over the past five years. Lily is up much, much more than Novo at this point. Clearly, the much deeper decline for Novo shows that obesity patients like the Lilly drug more.

So why would CVS switch to the other drug? It has explained that by doing so, it can make the drug cheaper and more available to more patients. It says that maximum weight loss isn't the only thing that matters for patient health. I take their point, but I think that anyone who has equal access to these drugs is probably going to prefer the Lilly drug on the numbers right now. I think that's born out in what patients are choosing. And a lot of patients are paying their own way on these drugs.

Both companies have launched in-house pharmacies where they will deliver these drugs directly to patients who are cash payers. These are people whose insurance won't cover the price of the drugs. The programs are pretty similar in price. If you're going to do Wegovi, that's the Novo drug, as a cash payer, you can start for $299 for one month, no matter which dose you start with, and then it's $499 a month thereafter. I know that's a lot of money, but we used to talk about list prices of over a thousand dollars a month for these drugs. These drugs are not at all like weight loss drugs in the

past. They've shown themselves to be very effective and they can help with conditions that are related to obesity. The Lilly drug that's $3.49 a month for the starting dose and then $4.99 a month for higher doses. It's typical for patients to start these drugs at low doses and work their way up afterward. One small difference with the Wigovia drug you get this injector pen with the lily drug if you're a cash payer They make you take a syringe and draw it yourself out of a vial and give yourself a shot That might be icky for some people if they're covered by insurance They get a nice auto injector pen where they push a button and the pen does the work for them The CVS change has to do with people who are covered by insurance. And what does this mean for investors? The CVS change

will affect around 200,000 ZEP bound patients. These patients are probably gonna have to make a decision whether to pay more for the medicine or switch to Wegovi. There are more details that I'm going through here about patients who want to appeal and so forth. So it's 200,000 patients, but Lilly has been adding 500,000 ZEP-bound patients per month overall. So this loss is not going to totally offset growth for the month.

What investors might see here is a small dent to growth for Lilly for one quarter, followed by a re-accel acceleration of growth in quarters ahead. So I don't think that's a big deal for the stock. In fact, there's two other developments for Lily one matters, probably at least as much and the other matters a lot lot more. It's working on an even newer obesity drug. I mentioned before that Lily's current drug is a dual agonist drug, the new one it's working on I guess you call it a tri agonist drug. The nickname for it among drug researchers is 3G and 3G has shown itself in trial

results to be even more effective than Zepp out. I guess that matters for extending Lily's dominance although as I said before the drugs that are already out there are pretty darn effective. The other development is called Orphorglipron. That's the sciency name. The thing will get a marketing name if and when it's approved, which analysts think could be as soon as next year. This Lillie drug just had some impressive results for diabetes. Wall Street is waiting to see some obesity results in August. And the thinking on Wall Street is that this drug might, might, based on results analysts

have seen so far, might be not quite as effective as Zep-bound for treating obesity, but about as effective as Wegovi. Why would that matter? Why would you want a drug that was only as effective as the second best drug because this is what's called a small molecule drug. Basically in this business when researchers say small molecule drugs, they mean ones that are made from chemistry when they say large molecule drugs. Those are ones that are made from living organisms. So the obesity shots that are out now These are large molecule drugs large molecule drugs tend to be finicky

You have to handle them a certain way you have to refrigerate these drugs and they have to be injected But a small molecule drug aspirin is an example of a small molecule drug They tend to be stable and that means that you can deliver them as pills They tend to be stable and that means that you can deliver them as pills. So what Lily is working on is a pill for diabetes slash obesity that appears to be about as effective as the injections that Novo currently has in the market. Now, of course, in the drug business, everything depends on what are the trial results? What about the regulatory approval, so let's not get ahead of ourselves. But you can imagine a world where these pills are cheaper to make, cheaper to sell,

you can distribute them anywhere in the world, it opens up more global markets, places in the world where they might not have, for example, a lot of access to refrigeration to store drugs, so it makes the market for these drugs a lot bigger, potentially. I have read reports that speculate, maybe you treat obesity in rich markets with injections and poor markets with pills.

Or maybe people start with injections, they lose their weight, and then they switch to pills for maintenance medications. I don't really know how the thing is going to shape up in the years ahead, but the obesity drug market stood at $15 billion last year. Morgan Stanley predicts it will hit $150 billion by 2035. It'll multiply by 10 in other words, just over half of that will be in the US alone. These stocks are not particularly cheap.

I'm not gonna go through all the numbers here. I wrote a column about this recently in Barron's, but Eli Lilly is a company that last year its earnings per share doubled to $13. By the end of this decade, by 2030, they could be at $55 a share. So if you don't own Lilly stock, if you're an index fund holder, you're not missing out. Eli Lilly is now the 12th largest company in America by stock market value, which means you have a pretty good weighting in your index fund. If you're wondering what's going to happen with the stock from here, my first advice would be to ask anyone but me.

I'm not a particularly skilled predictifier in such matters, but I would just say that if you believe the estimates, there's sufficient earnings growth to keep investors excited about the stock. If they stay as enthused in the years ahead as they are now, and you extrapolate out the earnings growth, you can come up with a decent gain for shares. JP Morgan calls the stock a top pick and it predicts a rise to $1,100 a share in a year. Who knows the recent price $765. So they're bullish.

Most of Wall Street is bullish. I think it's pretty easy to see what all the fuss is about. And that is obesity drugs. Now for some garbage and recycling. That's next after this quick break. This episode is brought to you by Square. You're not just running a restaurant,

you're building something big, and Square's there for all of it. Giving your customers more ways to order, whether that's in-person with Square Kiosk or online. Instant access to your sales, plus the funding you need to go even bigger, and real-time insights so you know what's working, what's not, and what's next.

Because when you're doing big things, your tools should too. Visit Square.ca to get started. Welcome back. There's been a little bit of a sell-off in waste management stocks. These stocks kind of trade like prized possessions on Wall Street. They're not cheap. So with this opportunity for a little bit of a discount from where they were, I figured it's a good time to take a look at the group. I'm not a waste management expert by any means. I can't really tell you what happens after the fellows come by and pick up the trash cans.

We have a few simple systems here at the house that seem to work for us. Put bungee cords on the cans to keep the raccoons out. I have a long, steep driveway, so when Put bungee cords on the cans to keep the raccoons out. I have a long, steep driveway, so when it's time to bring the cans up from the bottom after they're emptied out, I use the rolling down the window and reaching one arm out to hold one can at a time

on the way back up the driveway method. It's crude but effective. Or else I just tell the boy to bring them up. That's about all I know. Except I also know that there is a huge rush of landfill closings coming. And I know, except I also know that there is a huge rush of landfill closings coming and I know that from reading the research of Trevor Romeo at William Blair. He did a deep dive on this industry last fall.

He's out with a new report that says there's buying opportunities in this group. So I figured this is a good opportunity to reach out to Trevor for an industry rundown and to look at which stocks he likes most. Let's listen to part of that conversation now. It's kind of an interesting setup for the waste companies right now. I think what you've seen in the last maybe month or a little bit more has been some of the weakness on the commodity price side when you think about recycled commodity prices that can

fluctuate. And then the RIN prices, which are a lot of the economics on the renewable natural gas business at the landfills that a lot of these companies have developed, those have declined lately as well. RIN is like a credit that you get for producing this stuff, right? Exactly. It's through the EPA's renewable fuel standards program. It's where petroleum refiners and those types of companies have to buy a certain amount of these credits. And they're generated when the landfill gas is used in an application that these companies produce. So both the commodity prices on the recycling and on the rim side for renewable

natural gas have declined. The solid waste business for these companies, meaning kind of the traditional garbage collection and disposal is usually very, very steady and predictable. The investors really value the predictability of the garbage business. And this is one area where you can get a little bit more volatility. It's when you tend to see the recycled commodities

and the RIN prices fluctuate. In April, for example, when liberation day hit, we noticed an uptick in investor inbounds to us with interest in these solid waste names because they are so predictable. And I think some of that lately with a little bit of the uncertainty on the tariffs being resolved, the market getting a little bit more comfortable with them, I think you've probably just seen a little bit of investor rotation out of these types of really defensive growth, quality names. We've done some analysis of the valuations for the waste group

relative to the overall market. And at this point, the premium you've seen the waste companies trade at the last three to five years on average, you're actually below that now with the recent sell-off. These are usually premium price stocks. It's not often that you get a little bit of a discount like that on these stocks. Have I got that right? You absolutely have that right.

I think the main pushback we get from investors on these names when we recommend them is usually just the valuations are high. And we've seen this with other high quality service names outside this group even. You don't tend to see that many really obvious attractive entry points. So whenever you get a pullback like this, it tends to be a pretty good buying opportunity. In terms of the premium, I think you have typically seen,

I guess over the past three to five years, I'd say you've seen this group trade at a 15 to 20% premium to the S&P 500 on an EV to EBITDA basis. And now you're at about an 8% premium. So still a slightly more expensive than the overall market, but definitely less than you've seen over the past five years on average. And when you mentioned the commodity prices coming down, is that just macro related, that's just people's thoughts about the economy or what, what tends

to drive that, is there any concern that maybe that's going to continue or those are just kind of things that fluctuate every so often? Yeah, it's a good question. I mean, they do tend to fluctuate quite a bit, even from month to month sometimes, but ultimately it's tied to the supply and demand for these recycled products that our companies are processing when they collect plastics and fibers and cardboards and all that stuff. They run it through their facilities

and sell it to a paper mill or a plastic bottling company or something like that. When the tariffs hit in April, I think it's probably fair to say that consumer package goods producers who are probably a very large consumer of these recycled commodities because they use it in their packaging probably took a little step back and said, maybe I want to pause and be what happens in the world. The next few months, there was just looking at our file attracts commodity prices over time at this point for the main commodities you're below the five year average on those prices at this point.

So that gives us maybe a little bit more confidence that even if you do see further downside, it's not going to be hugely significant, but it's just really hard to tell because they can be volatile at times. Talk to me about how these companies make their money, you know, as to be hugely significant, but it's just really hard to tell because they can be volatile at times. Talk to me about how these companies make their money, you know, as a regular homeowner, I see the fellas come by and pick up the trash cans. That's a valuable service and they get paid for that. And that's what I see. But there's more money that's made down the road for these companies.

What all are they involved in and where does their money come from? For sure. So I think with, you know, the four public companies that we cover, especially, there's a very high degree of vertical integration. I mean, you pay them when they collect your garbage at your house, or if you're a small business owner or an industrial facility or anything like that, you pay them to collect your waste beyond collection. There are transfer stations, which will take a lot of the trash out

of the garbage trucks, compact them, and make it more efficient before it's sent off to a landfill or a recycling facility. And that's an important piece of infrastructure. And then beyond that, after it goes through a transfer station, you have the landfill business, which is, on an EBITDA margin perspective, the most lucrative business at these companies, is, on an EBITDA margin perspective, the most lucrative business at these companies and the recycling business. So at every point along the way, our waste companies, if they own those assets, are making some sort of return, whether it's revenue or if it's just saving internal costs by dumping in their own landfill versus having to pay a competitor at their landfill to dump.

And then now you even have with this renewable natural gas business, once the garbage is in a landfill, it creates this methane over time. And rather than just flaring that off into the atmosphere, which is worse for the atmosphere, the companies are able to collect that gas, purify it, extract kind of the pure methane or close to a hundred percent pure methane. And then it becomes pipeline quality, natural gas. And so they're able to monetize that as well. You know, not too far from me, there's an area that I gather used to be a landfill.

You couldn't tell it today. It's no longer a landfill. It's been turned into this really lovely park. I gather from reading your research that there's a lot more of that coming in the decades ahead with, uh, with America's landfills. Absolutely. I think that was really the main trend that we identified that gives a lot of

these companies structural competitive advantages over time. The EPA has this great database of landfills in the U S it may not include every single one, but it includes over 1200 landfills, which we think is the majority of the current operating landfills. If you look at the projected closing dates, which are just based on the current permits in existence now, almost half of all the landfills that are open today are expected to close by 2050. And what you've seen over the past several decades and still today is the amount of new landfills being created has drastically shrunk as well. Now, the trend has been toward bigger landfills owned by a smaller amount of competitors. And so again, it's the large

public companies that we cover that own the majority of the landfill volumes in the US now. So it's really been concentrated into a smaller and smaller amount of hands. Yes, I think half of the landfills are expected to close by 2050. I don't think that'll actually happen in practice because I think out of necessity, you'll likely see some communities decide they do need to expand and you'll end up with again, more and more landfills being concentrated in the biggest players hands. Yes.

I vote for more landfills where everyone else lives, not where I live. I gather that that's how everyone feels. So I can see how that would be a problem and how this coming shortage of capacity would really support higher prices for these services and higher profit margins going forward. And there are not many players that are in position to benefit from this in terms of the publicly traded ones, right?

This is a business that seems like, as you said, there were many small players, but these large vertically integrated ones, we're talking about just a few of them. Can you run us through the group that you cover and tell us what you think differentiates them? Absolutely. So there are five public solid waste companies or companies that primarily operated in the solid waste industry. We cover four of them.

That would be WM or waste management is the biggest. Republic Services is number two. Waste Connections is number three. Then Casella Waste Systems, which is a smaller regional company based in the Northeast, they are probably, at least in terms of the landfill volumes that we can see, maybe like the fifth or sixth or seventh largest player in the US. There is a fifth company, GFL, who is based in Canada,

but also is the number four in all of North America, which we don't cover, but is very similar to all of our companies. And so what differentiates them? Well, I mean, at the end of the day, picking up garbage is pretty similar everywhere, but there are a lot of specific regional differences. So for one, the Northeast is facing the most,

it's a critical shortage of landfill capacity. I mean, there's a nationwide shortage of capacity, I guess, but in the Northeast, it's especially acute. So Casella, for example, being based in really the New England states primarily, and they've expanded a little bit the last several years. And then otherwise, I think all of the other public companies, the primary difference I'd see there at this point would be the different ancillary businesses that they're in. So for example, Waste Connections has an E&P waste business where they have landfills that dispose of oil and gas drilling, clippings and things like that, which is a little bit more sensitive to the cyclicality.

Republic Services has this environmental solutions segment where they will manage hazardous waste. They have landfills that only accept hazardous waste and they'll have a bunch of industrial cleaning and field services and disaster remediation and things like that. And then waste management, they just acquired Stericycle last year. So that is the biggest medical waste company in the country. So picking up sharps and hazardous materials from hospitals and such, and sanitizing and eventually disposing of those items. The companies that you cover, you have a bullish rating on all of them. Is there one that's a favorite of yours? So I think with the deep dive

that we've done on the industry, we do have a structurally positive view on the solid waste business. So we do favor all four of the companies and think they will be good investments over the long term. I think our top pick has, and then will continue to be for the near term at least, the solid waste systems. Two things that are really important about Kasella. One, it's essentially just a pure play solid waste and recycling company. So when I was talking about those ancillary businesses for the other three companies we cover, Kasella doesn't really have any of that because they haven't gotten large enough to where the growth opportunity for

the garbage and recycling business has slowed down at all for them. In fact, they have accelerated their M&A in that space in the last probably five years. And with them being in 10 states now, there's still plenty of runway for them to expand into additional states and to add increasing density to the states that they're already in. And does that manifest itself in them being a faster grower? You see them as being able to grow earnings or free cash flow or what have you faster than the other players? On a total basis, including the acquisitions? Yes, I definitely would. It's really to some degree, just a function of size. Generally, we see a big M&A opportunity across the whole solid waste business.

It's just when you're talking about Casella at a $7 billion market cap versus waste management with a $90 billion market cap, there's a big difference in terms of what buying a few mom and pop small operators can do for your revenue and your earnings on a percentage basis. I think I would expect most of these companies to have pretty

similar organic growth rates, but the M&A opportunity for Cassellate on a relative basis for their smaller size, it's so much larger. Last question. These are steady earners. They traded premium prices. So I'm guessing that the upside for investors, what investors should expect or hope to make from these stocks isn't, you know, the same as they might have on a go-go growth stock or, you know, something like that.

Where are your predictions for these stocks? Like for your favorite, Casella, what would you expect that investors can make there over the coming years in that stock or the next year? Yeah, it's a great question. So I think generally, as you say, these are typically expensive stocks. So when we make our forecasts and our rating decisions, we don't usually build in multiple expansion into the upside case. I think it's really more about the growth that you'll get.

And so going back to Casella, I think double digit free cashflow growth compounding over the next several years is a pretty fair assumption. We don't explicitly model that in future years because, you know, we never know when an M and a transaction will happen, but I think it's pretty fair to expect that given the track record and the amount of opportunities out there. And when I say double digits, I think it's a fairly conservative way to describe the opportunity. I think it is a really strong value proposition to investors.

Thank you, Trevor. I want to thank Trevor Romeo at William Blair. Anyone else to thank this episode, Alexis? New York City's rats are, yeah. The rats, but that's a public official. We don't have to thank public. We have to. All right.

I mean, Alexis feels like you're doing a pretty decent job. Is that fair to say? Yeah. No more rivers of hot garbage juice. That's a plus. Congrats. And of course, I want to thank all of you for listening. If you have a question that you'd like played and answered on the podcast. I mean, not like romance or fishing or something. It's gotta be a little bit investy. You can send it in it might be in a

future episode. Just use the voice memo app on your phone and send it to jack.how. That's h-o-u-g-h at barons.com. Alexis Moore is our producer. You can subscribe to the podcast and Apple podcast, Spotify, or wherever you listen. If you listen on Apple, you can write us a review. See you next week.