Wise investors have often suggested a few basic principles for investors to live by: (1) Invest in businesses you can understand, (2) Invest in businesses that you know will not be going away, and (3) Look to those businesses where there are high barriers to entry and a steadily growing demand. Luckily for investors in the waste management services industry, it meets all of these criteria. The business model is simple (relatively), the companies collect, transfer, recycle, and dispose of trash. Some of these companies own and operate landfills, and charge other competitors service fees to utilize their facilities. Waste management and recycling will always be a need, as long as people continue to use and dispose of materials, and additionally some competitors in this space generate income from the processing of recycled materials, and energy production from the landfill operations. Lastly, as long as the world (and United States) population continues to rise, demand for waste management should continue to increase slowly and steadily. On those same lines with space at a premium, those companies owning and operating landfills will be able to charge higher and higher fees to those in need of their facilities.
Waste Management (WM)
Waste Management is likely the best known company in this space, as the largest provider of integrated waste management solutions with a market cap of nearly $20 billion. WM serves residential, commercial, and industrial customers, and the company has more than 21 million customers, five active hazardous waste facilities, 264 active landfills including 137 landfill to gas projects, 114 recycling facilities, five power plant projects, and 17 waste-to-energy plants. WM has been a very environmentally and energy conscious company, including managing a fleet of nearly 2500 natural gas vehicles.
WM shares trade at current price of $41.62, giving shares a TTM P/E of nearly 20 on earnings of $2.10. This is well above the company's five-year average of 17, and comes on the heels of a recent 1cent decline in the year-over-year earnings. Despite this, analysts estimate full-year 2013 earnings coming in at $2.17/share, representing just a 3.3% increase over the previous year. On top of this, analysts see earnings rising nearly 10% in 2014, with annual increases in the neighborhood of 7.5% over the next five years. WM pays an annual dividend of $1.46, yielding 3.5% at current prices, which would represent a payout of 67% of earnings. The company has managed CAGR of the dividend at 6.2% over the past five years and has a history of returning capital to shareholders with nearly $7 billion in dividends and buybacks since 2007.
While I love the business model of WM, I dislike the current valuation. Investing in WM can provide investors with a steady rise in the price of the stock and the annual dividend; however, at this valuation, long-term gains are minimalized. As an investor I would be interested in initiating a position in WM if shares fell to $35, to obtain a satisfactory return.
Republic Services Inc (RSG)
RSG, the largest competitor to WM provides non-hazardous solid waste collection, transfer, and recycling and disposal services for commercial, industrial, municipal and residential customers in the United States and Puerto Rico. The company has a market cap of $12 billion, and a vertically integrated waste and recycling program. RSG has invested in strengthening the company's asset base by building a modern fleet, maintaining a strong landfill network, and growing the recycling infrastructure. With diversified sources of income, including commercial (29%), residential (24%), Transfer and Landfill (17%) and Recycling (9%) RSG is capable of weathering weakness in any one segment while continuing to grow earnings.
Shares of RSG trade at $34.37, representing a TTM P/E of 22.5, below the five-year average of 26.5. RSG has seen EPS fall slightly over the past year, down 1.3%, with an uptick of 10% expected over the next year, and analysts anticipate EPS growing by at an average annual rate of 5.4% over the next five years. RSG pays a dividend of $0.94 annually, representing a 2.76% yield at the current share price, on a payout of 61% of earnings. Over the past five years, RSG has managed 6.7% annual increases to the dividend, and with steady earnings growth RSG should be able to maintain that rate over the near term.
While I like the valuation of RSG better than that of WM, at the current price, RSG is still too pricey for a dividend stock slowly growing earnings and the dividend. If RSG were to drop below $30, I would look to initiate a position to capture capital gains and a steadily growing, reliable dividend.
U.S. Ecology (ECOL)
U.S. Ecology is one of the few companies in the United States that provides treatment and disposal of radioactive and hazardous wastes. The company is the nation's most comprehensive supplier of cost effective waste treatment and disposal services for low-level radioactive wastes, naturally occurring, accelerator produced and exempt radioactive materials, and hazardous and PCB wastes. As long as the United States has Nuclear Power, there will be a need for companies like ECOL to provide services to treat and dispose of these hazardous wastes. ECOL is somewhat of a niche business, serving a relatively small market, with a market cap of just $516 million.
Trading at 28.08, shares of ECOL have a TTM P/E of 19, roughly in line with the company's five-year average of 19.8. Between 2012 and 2013, ECOL increased the volume of waste processed 4%; however, the price of processing increased by an astounding 19% and as a result, ECOL has seen earnings climb 33% year over year on a 16% increase in revenue. On top of this recent growth, ECOL is expected to grow earnings an additional 16% in the next year, with longer-term EPS estimates anticipating annual double-digit gains. At the end of Q1, ECOL had $4.5 million in cash on the balance sheet, and had invested nearly $7 million in capital back into the company. The company has low debt ($41 million), relative to the broader industry, and returns capital to investors through an $0.18 quarterly dividend. Based on current earnings and share price, ECOL yields 2.56% on a 49% payout ratio. ECOL has not been a dividend growth stock, given that the dividend has remained at $0.18/quarter since Q3 of 2008, but the company continues to reward shareholders with capital growth. Management has reaffirmed its position of maintaining the dividend at $0.18 throughout the year to free up additional funds for capital investments.
Outlook appears favorable for ECOL, with anticipation of growth in the base waste processing business and anticipated margin expansion. Full-year capital expenditures are anticipated to top $22 million, including $3.4 million carried over from 2012. The company has moved up construction of a landfill in Nevada, from 2013 due to the strength of the business, with additional construction taking place in Texas, and Quebec, and has purchased land in Texas, to support the company's long-term growth and expansion plans. ECOL serves a relatively small market, but it is a market that will be around for quite some time. With few companies able to provide the services for ECOL, it makes for an interesting investment opportunity. While I would like to see ECOL management implement a policy of growing the dividend, as an investor, I would feel confident in the safety of the ECOL dividend, and the continued upward direction of the stock. I would buy into the stock on pullbacks to $27.50 or below, and could see the price climbing as high as $35 by the end of the year.
The world of waste management is one of constant demand and limited supply. Consumers, companies, and corporations all produce waste that must be handled, processed, recycled, or otherwise properly disposed of; however, there are a limited supply of service providers, equipment, and locations for storage and processing. This steadily growing demand, in line with steadily declining supply of waste management facilities, ensures waste management providers continue to have significant say in the pricing of waste management services. Companies like WM, RSG, and ECOL will be around for years and years, and patient investors can hop on board to enjoy the steady growth of these great stocks from the waste management industry.