Recycling Companies

March 05, 2021

by a searcher from University of Pennsylvania - The Wharton School in Dallas, TX, USA

Thoughts on recycling companies as quality acquisition targets? Steel, aluminum, electronics, rare earth metals, magnets, etc.

Also curious about thoughts on different parts of the supply chain: collectors, smelters, re-casters, distributors, etc

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Reply by a searcher
from INSEAD in Los Angeles, CA, USA

I looked at a plastics recycling firm. Growth potential was good, demand for the recycled material was also good (but to Goncalo's point exposed to commodity price), but the killer was the cash conversion. They needed a lot space to store the waste (so lot's of working capital) and the recycling machines were expensive and with huge energy bills. This would make scaling very expensive as you continuously have to spend money in new machines and working capital. As machines become energy efficient with time, the competitor with the newest machine will have the ability to undercut you on price.

Reply by an investor
from Universidade Católica Portuguesa in Lisbon, Portugal

Watch out for the commodity risk. Reason why several waste management companies have gone in and out of the space in the past is that your input (trash) is relatively fixed cost while your output is variable cost with no correlation to your output, so when the commodity price fluctuates you see a margin crunch.
Best recycling businesses are the ones where someone pays you a specific fee for recycling (for instance a community that wants to recycle) that gives you a good enough return and the impact of commodity prices is a cherry on top of the cake, not your main business

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