Waste Management (WM) is growing with its recent acquisitions of other waste management companies in August 2013, one of which we discussed in our previous article on the company. Waste Management is on an acquisition spree to acquire other waste management companies in one of its significant revenue contributing regions - the Pacific Northwest.
Also, the waste management players are focusing on share repurchases. The major industry players Waste Management, Progressive Waste Solutions (BIN), and Republic Services (RSG) are fetching investor's attraction with share programs.
Boost with acquisition
Waste Management acquired Oak Grove Disposal, an Oregon based recycling and waste collection company, in August 2013. Waste Management already serves customers of Oregon under its Pacific Northwest region, and with this acquisition, it intends to further penetrate this region. This is Waste Management's third acquisition in the area, which is followed by acquisition of Gruetter Sanitary and Trashmasters.
Currently, Waste Management serves more than 20 million customers globally and generated around $13.64 billion revenue last year. These figures led us to estimate that it generates revenue of around $688 per customer. Waste Management currently serves more than 23,000 customers in Oregon, which we estimate to generate revenue of $15.8 million. With the acquisition of Oak Grove Disposal, Waste Management added around 10,000 customers to its current customer tally, increasing the revenue from Oregon by 43.54% to $22.68 million.
Spree of share repurchases of waste management companies
Waste Management announced a share repurchase program of $500 million in its fourth quarter report of 2012. The company's net income in the last fiscal year was $817 million at earnings per share, or EPS, of $1.76, which resulted in 464.20 million outstanding shares. If we consider that the company will repurchase at the current market price of $40.40, then it will repurchase around 12.3 million of its outstanding shares. This will decrease the outstanding shares to 451.9 million. Assuming that the net income of Waste Management is constant for this fiscal year, then we expect EPS to rise to $1.80. This is a small growth of 2.27%, so we expect that the share repurchase program will not majorly impact the stock in the near term.
Its nearest rival in the waste management industry in terms of market capitalization is Republic Services. In its August 2013 investor's presentation, Republic Services reported share repurchase of $325 million. In December 2012, the company had 361.1 million outstanding shares. Assuming that Republic Services repurchases shares at the current stock price of $33.28, then for $325 million we expect that the company will repurchase around 9.76 million outstanding shares. This will reduce the outstanding shares to 351.34 million by the end of this year. Republic Service's net income in 2012 was $571.8 million, which we consider constant for this fiscal year. With this net income and 351.34 million outstanding shares, we expect that the company's EPS will rise to $1.62. In 2012 Republic Services EPS was $1.55, and we expect that the share repurchase program will increase it by 4.51%. In past five months the company's stock has not shown much movement and an increase of 4.51% is not expected to significantly incline the stock price.
Another player in the waste management industry that will repurchase its shares is Progressive Waste Solutions. On August 16, 2013, Progressive Waste Solutions announced renewal of its earlier share repurchase program. This repurchase program was authorized in December 2011 to repurchase shares for around $300 million. As per its renewal announcement, Progressive Waste Solutions will buy back shares over the period of August 2013 to August 2014. Under the repurchase program the company repurchased around 5.78 million shares till Aug. 13, 2013, which left around 115.17 million outstanding shares currently. With the renewal of the share repurchase plan, Progressive Waste Solutions is expected to repurchase around 7.5 million shares through August 2014. This will reduce the outstanding shares to 107.67 million shares next year.
Progressive Waste Solutions' net income last fiscal year was $94.35 million with EPS of $0.81. Assuming this net income to be constant for August 2014, with 107.67 million outstanding shares, we expect EPS to increase to $0.87, which is a growth of 7.4%. This growth is expected to incline Progressive Waste Solutions' stock going forward.
WM Dividend data by YCharts
Waste Management has a robust history of dividend. In its second quarter of fiscal year 2013, the company reported $347 million as free cash flow, out of which $171 million was returned to shareholders as dividend. It announced on August 22, 2013 a quarterly dividend of $0.365, which was paid on September 20, 2013.
Waste Management's historical dividend yield history from the past five years is also quite strong. The company's dividend yield in the past five years has ranged from 3.20% - 4.95%. Waste Management's current dividend yield is 3.59%, closer to its average dividend yield. Its current dividend yield is also higher than the industry's dividend yield of 3.1%.
Progressive Waste Solutions' dividend yield does not favor its stock. Its five year historical dividend yield range is 1.89% - 2.95%, with an average dividend yield of 2.43%. Its current dividend yield is 2.22%, lower than the average figure.
Similarly, Republic Services dividend yield does not favor its stock. Its dividend yield in past five years has ranged between 2.33% - 4.54%, and the current dividend yield of 3.17% is lower than the average dividend yield of past five years. Its share repurchase program is also not impacting its share price. We expect that Republic Services' stock price will not show much movement in the near term.
Waste Management's forward price to earnings, or PE, ratio for next fiscal year is 16.98, significantly lower than trailing PE of 22.32. A lower forward PE ratio signifies that the stock is currently undervalued and is expected to grow in the future. The trailing PE of Waste Management is also lower than the industry's trailing PE of 26.41, which implies that the company's stock is currently undervalued. Another valuation measure, return on equity, or ROE, also favors the growth of Waste Management's stock. Its ROE is 13.3%, more than double the industry's ROE of 6.4%. The strong valuation and fundamentals of the company hint that Waste Management's stock is a long term buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article