In this article, let's take a look at Waste Management Inc. (WM, Financial), a $22.37 billion market cap company, which is the largest U.S. trash hauling/disposal concern.
Macro scenario
Two important things in the macro scenario should be said. First, current conditions continue to place pressure on customers and so in prices. Second, waste generation is lower than in the U.S. housing boom. The result of both is that (possibly) they can lead to pricing pressure, which makes it difficult for the company to surpass it. Nevertheless, we believe that waste volumes would recover in the future so we think the firm could sustain price increases.
Plans and acquisitions
In 2007, it announced an environmental plan in order to invest in waste-based energy production. The amount is $500 million a year for a decade to increase the fuel efficiency of its fleet. In this sense, the company focuses to reach about 90% to 95% compressed natural gas for its truck fleet in the next years.
Turning our attention to acquisitions, in 2010 it acquired a 40% interest in Shanghai Environment Group (SEG), a leading waste-to-energy company in China, for $142 million. Later, it bought a waste-to-energy plant in Virginia in a $150 million deal. In 2011, it was the turn of Oakleaf Global Holdings for $425 million. Oakleaf had a network of 2,500 haulers, and it was expected that Waste Management expand its customer base.
Dividends and share repurchases
Dividends have been paid since 1998 and a 2.73% dividend hike in March showed commitment to return cash to investors.
We believe the firm will use the proceeds from sales to repurchase shares and pay down debt. So we think this mechanism will continue in 2014 after it purchased $239 million during the fourth quarter of 2013.
Revenues, margins and profitability
Looking at profitability, revenue slightly grew by 0.99% but earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.45 vs $0.52). During the past fiscal year, the company reported lower earnings of $0.21 versus $1.76 in the previous year. This year, Wall Street expects an improvement in earnings ($2.35 versus $0.21).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| WM | Waste Management | 2.03 |
| ECOL | US Ecology Inc | 18.60 |
| ROL | Rollins Inc | 30.33 |
| WCN | Waste Connections Inc | 10.86 |
| CLH | Clean Harbors Inc | 6.83 |
| Â | Industry Median | 2.03 |
The company has a current ROE of 2.03% which is lower than its peers: Waste Connections (WCN, Financial) and Clean Harbors (CLH, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, US Ecology (ECOL, Financial) and Rollins (ROL, Financial) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 179.5x, trading at a premium compared to an average of 81.0x for the industry. To use another metric, its price-to-book ratio of 3.8x indicates a premium versus the industry average of 1.76x while the price-to-sales ratio of 1.6x is above the industry average of 0.98x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $18,612, which represents a 13.3% compound annual growth rate (CAGR).
Final comment
As outlined in the article, the environmental plan is as a positive long-term strategy, but commodity markets continue to make less predictable cash flows. Further, if the Oakleaf acquisition fails to generate a volume improvement, this could make a bad business.
The PE relative valuation and the low levels of the return on equity make me feel bearish on this stock.
Hedge fund gurus like Joel Greenblatt (Trades, Portfolio), David Dreman (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Jim Simons (Trades, Portfolio) and John Buckingham (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Manning & Napier Advisors, Inc. and NWQ Managers (Trades, Portfolio). On the other hand, Paul Tudor Jones (Trades, Portfolio) sold out the stock while Ray Dalio (Trades, Portfolio) reduced his positions.
Disclosure: Omar Venerio holds no position in any stocks mentioned
