Waste Management: A Smart Choice For Investors

| About: Waste Management, (WM)

Garbage is a big business. Regardless of what the economy is doing, people are throwing things away, and trash removal is absolutely necessary. Waste Management (NYSE:WM), the largest processor of waste in North America, is making good money from garbage collection. With 264 active solid-waste landfills, Waste Management is the largest collector and processor of trash in the U.S., serving over 21 million customers.

Waste Management reported financial results for its third quarter of 2013 that beat expectations. Revenues for the third quarter were $3.62 billion, up from $3.46 a year earlier. The company reported net income of $291 million, compared to $214 million for the same period in 2012. Waste Management is confident to meet its earnings forecast for the full-year 2013.

According to research, global municipal solid waste (MSW) is expected to double by 2025. The U.S. solid waste management market is expected to grow at a rate of 3.4% through 2015. The growth will be driven by increasing U.S. population and higher consumer spending. Waste Management also collects and disposes hazardous and medical waste. The U.S. medical waste management market is forecast to reach $3.5 billion in 2017.

Waste Management gets paid to remove garbage. The company is creating new ways to turn that garbage into energy. Garbage is an excellent source to generate electricity. Waste Management is generating energy through landfill gas and burning waste, the energy is used to power its homes and business. The company generates 550 megawatts of electricity using landfills which is enough to power 444,000 homes. Energy produced by Waste Management is more renewable energy than the entire solar industry in the United States.

Waste Management is increasing investment in technologies that can convert landfill into fuels, electricity and other energy products. Demand for renewable energy is also increasing. Global waste to energy market is estimated to reach $29.2 billion in 2022 from $6.2 billion in 2012. European waste to energy market will grow from $4.22 billion in 2012 to $4.94 billion in 2016. In 2011, 19% of the world's global consumption was supplied by renewable energy. This percentage increased to 21.7% in 2012. Waste Management intends to expand its waste-to-energy business which will bolster its revenues and earnings. The company aims to power more than 2 million households by the end of 2020, compared to the current capacity of 1.2 million.

The waste management industry has significant barriers to entry because new landfills are hard to site and expensive. Waste Management has been making acquisitions for expansion of its network. Recently, the company acquired Summit Energy Services and Liquid Logistics, energy services companies. Acquisition of the energy companies is proof of the company's long term vision. The acquisition will help Waste Management to enhance its environmental service offerings to oil and gas industry customers. The company also acquired Greenstar to expand customer base and recycling capacity. Waste Management plans to increase its recycling facility to 20 million tons by 2020, up from 12 million tons handled in 2012.

Waste Management has been expanding its presence in the Chinese market. China has become the largest MSW generator in the world. Due to rapid urbanization, quantity of municipal solid waste is growing in the country. In China, the quantity of municipal solid is projected to increase from 157 million tons in 2009 to 585 million tons in 2030. The country's waste-to-energy market is also set for rapid development for the years to come, as a result the company will generate significant revenue from the China market.

Republic Services (NYSE:RSG), the second-largest U.S. provider of solid waste services in North America, is Waste Management's largest competitor. Like Waste Management, Republic Services is also acquiring companies for future growth. Both Waste Management and Republic Services have long-lived assets on the balance sheet, and both the companies use long-term debt to finance the assets.

Waste Management's balance sheet is a weak point. With the total debt/equity ratio of 144%, Waste Management holds a very large amount of debt. Republic Services has a total debt/equity ratio of 91%. All of Waste Management's equity consists of goodwill. Waste Management total debt/income ratio is a bit over 12x, meaning that if all income were to be focused on debt reduction, it would take roughly 12 years to pay the debt off. The high debt is not risky in the short term, but if Waste Management fails to improve revenue/earnings then this can cause problems.

Bottom line

Waste Management is increasing energy production that will provide a good income in the future. Waste Management will likely continue to make acquisitions. Acquisition of smaller players in the industry will continue to provide growth opportunities, earnings growth for the company will come from acquisitions. The company is innovating new ways to create cash from trash. In my opinion, Waste Management still has a great upside potential.

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.

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