Waste Management's Earnings Decrease 1% Year Over Year, But Is It A Sell?

Feb.20.14 | About: Waste Management, (WM)

Waste Management, Inc. (NYSE:WM) is a provider of waste management services in North America which collects, transfers, recycles and disposes of waste. The company reported earnings before the market opened on 18Feb14 and on the surface all the results seemed bad with the company reporting earnings of $0.56 per share (in-line with estimates) on revenue of $3.5 billion (missing estimates by $80 million). What I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Revenues (millions)

4Q13

4Q12

Y/Y

Commercial

$ 857

$ 846

1%

Residential

$ 652

$ 652

0%

Industrial

$ 550

$ 538

2%

Other

$ 73

$ 70

4%

Landfill

$ 705

$ 689

2%

Transfer

$ 332

$ 335

-1%

Wheelabrator

$ 211

$ 215

-2%

Recycling

$ 356

$ 330

8%

Other

$ 392

$ 385

2%

Intercompany

$ (628)

$ (626)

0%

Total

$ 3,500

$ 3,434

2%

Click to enlarge

Compared to last year total revenue has increased 2%. Honestly there really isn't anything of interest to me in this particular portion of the earnings report. It seems like everything is chugging along at a slow rate which is great for a high-yielding dividend payer.

Income Statement

Income Statement (millions)

4Q13

4Q12

Y/Y

Revenue

$ 3,500

$ 3,434

2%

Operations

$ 2,267

$ 2,224

2%

Selling, general and administrative

$ 376

$ 356

6%

Depreciation and amortization

$ 327

$ 326

0%

Restructuring

$ 5

$ 16

-69%

Expense from divestitures, asset impairments and unusual items

$ 935

$ 28

3239%

Income from operations

$ (410)

$ 484

-185%

Interest expense

$ (118)

$ (122)

-3%

Interest income

$ 2

$ -

N/A

Equity in net losses of unconsolidated entities

$ (15)

$ (11)

36%

Other

$ (62)

$ (2)

3000%

Income before income taxes

$ (603)

$ 349

-273%

Provision for income taxes

$ (4)

$ 114

-104%

Consolidated net income

$ (599)

$ 235

-355%

Less net income attributable to noncontrolling interests

$ 6

$ 11

-45%

Net income attributable to the company

$ (605)

$ 224

-370%

Diluted common shares outstanding

470.5

464.8

1%

Earnings per diluted share

$ (1.29)

$ 0.48

-367%

Non-GAAP Legal reserve and landfill operating costs

$ 1.85

$ 0.09

1956%

Non-GAAP earnings per diluted share

$ 0.56

$ 0.57

-1%

Click to enlarge

Looking at the income statement at first glance is not appealing as you look at the bottom line and notice that earnings decreased by 1% from last year. I'd like to sift through the income statement to see why that was the case. First thing to notice is that restructuring costs decreased by 69%. The next line of the statement shows a 3239% increase in expense from divestitures, asset impairments and unusual items. Due to the poor operating efficiency, income from operations decreased by 185%! But this was primarily due to operating recently acquired businesses and labor expense increases. Equity in net losses of unconsolidated entities increased 36% while other expenses increased 3000% which helped income before income taxes decrease 273%! Provision for income taxes decreased 104% but wasn't enough to help consolidated net income which decreased 355% year over year. After you subtract the 45% decrease due to income attributable to noncontrolling assets you get a 370% drop in net income attributable to the company. Because the company reported a 1956% increase due to non-GAAP legal reserve and landfill operating costs, the company was able to report positive earnings of $0.56 per share.

Balance Sheet

Balance Sheet (millions)

4Q13

4Q12

Y/Y

Cash and cash equivalents

$ 58

$ 194

-70%

Receivables

$ 1,810

$ 1,839

-2%

Other

$ 631

$ 390

62%

Total current assets

$ 2,499

$ 2,423

3%

Property and equipment

$ 12,344

$ 12,651

-2%

Goodwill

$ 6,070

$ 6,291

-4%

Other intangible assets

$ 529

$ 397

33%

Other assets

$ 1,161

$ 1,335

-13%

Total assets

$ 22,603

$ 23,097

-2%

Accounts payable, accrued liabilities, and deferred revenues

$ 2,288

$ 2,293

0%

Current portion of long-term debt

$ 726

$ 743

-2%

Total current liabilities

$ 3,014

$ 3,036

-1%

Long-term debt, less current portion

$ 9,500

$ 9,173

4%

Other liabilities

$ 4,087

$ 4,213

-3%

Total liabilities

$ 16,601

$ 16,422

1%

WM stockholders' equity

$ 5,707

$ 6,354

-10%

Noncontrolling interests

$ 295

$ 321

-8%

Total equity

$ 6,002

$ 6,675

-10%

Total liabilities and equity

$ 22,603

$ 23,097

-2%

Click to enlarge

When taking a glance at the current assets side of the balance sheet, you immediately notice that cash decreased 70%! Other current assets increased 62% and helped total current assets increase 3% from the prior year. Other intangible assets increased 33% while other long-term assets decreased 13% and contributed to an overall 2% decrease in assets from last year. On the short-term debt side of the equation we see a 1% decrease while overall debt increased 1%.

Conclusion

The company reported earnings which were 1% lower than the year before on increasing revenue while the share price was up 12.26% in the past year excluding dividends. The decrease in earnings was due primarily to poor operating efficiency. The diluted share actually increased by 1% and actually helped earnings by 3% as ironic as that may seem; it's because on a GAAP basis the company was operating at a loss. This earning report is crappy to say the least because I don't like to see a drop in earnings especially if you have an increase in revenue. On a fundamental basis, I believe this company is fairly valued with respect to 2015 earnings. The stock was down 4.47% the day of reporting earnings in the face of an S&P500 which gained 0.12%. The damage was bad, even in the face of a 2.7% increase to the dividend and an announcement of a $600 million share repurchase program. I'm going put the stock in the penalty box till I see some better operating efficiency.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long WM. 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.