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Summary

  • Earnings per share and revenue were up from the prior year.
  • The stock is fairly valued.
  • Free cash flow guidance was increased.

The last time I wrote about Waste Management, Inc. (NYSE:WM), I stated:

"…I will not be adding to my position now because I think I can get it at a lower price." Since that article was published the stock is down 6.2% while the S&P 500 (NYSEARCA:SPY) is up 4.21%. Waste Management 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 24Apr14 and on the surface the results were mixed with the company reporting earnings of $0.49 per share (beating estimates by $0.05) on revenue of $3.4 billion (missing estimates by $10 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)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Commercial

$ 846

$ 857

$ 840

-1%

1%

Residential

$ 635

$ 652

$ 645

-3%

-2%

Industrial

$ 516

$ 550

$ 512

-6%

1%

Other

$ 77

$ 73

$ 58

5%

33%

Landfill

$ 632

$ 705

$ 628

-10%

1%

Transfer

$ 306

$ 332

$ 300

-8%

2%

Wheelabrator

$ 230

$ 211

$ 205

9%

12%

Recycling

$ 347

$ 356

$ 358

-3%

-3%

Other

$ 387

$ 392

$ 378

-1%

2%

Intercompany

$ (580)

$ (628)

$ (588)

-8%

-1%

Total

$ 3,396

$ 3,500

$ 3,336

-3%

2%

The collection side of the business was flat in commercial, industrial, and residential pickups but was up 33% in the "other" segment. The other portion of the trash pickup business accounts for 2% of the business so it didn't really contribute much to the top line. Other operating revenues included a 12% gain in the Wheelabrator segment of the business. Wheelabrator is the waste-to-energy portion of the company which accounted for 7% of all revenue. Total revenue increased 2% from last year which should bode well for the income statement, let's see what happened with that portion of the earnings report next.

Income Statement

Income Statement (millions)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Revenue

$ 3,396

$ 3,500

$ 3,336

-3%

2%

Operations

$ 2,232

$ 2,267

$ 2,209

-2%

1%

Selling, general and administrative

$ 375

$ 376

$ 390

0%

-4%

Depreciation and amortization

$ 317

$ 327

$ 323

-3%

-2%

Restructuring

$ 1

$ 5

$ 8

-80%

-88%

Expense from divestitures, asset impairments and unusual items

$ 2

$ 935

$ 4

-100%

-50%

Income from operations

$ 469

$ (410)

$ 402

-214%

17%

Interest expense

$ (122)

$ (118)

$ (122)

3%

0%

Interest income

$ 1

$ 2

$ 1

-50%

0%

Equity in net losses of unconsolidated entities

$ (9)

$ (15)

$ (8)

-40%

13%

Other

$ (3)

$ (62)

$ (11)

-95%

-73%

Income before income taxes

$ 336

$ (603)

$ 262

-156%

28%

Provision for income taxes

$ 99

$ (4)

$ 86

-2575%

15%

Consolidated net income

$ 237

$ (599)

$ 176

-140%

35%

Less net income attributable to noncontrolling interests

$ 9

$ 6

$ 8

50%

13%

Net income attributable to the company

$ 228

$ (605)

$ 168

-138%

36%

Diluted common shares outstanding

466.9

470.5

466.5

-1%

0%

Earnings per diluted share

$ 0.49

$ (1.29)

$ 0.36

-138%

36%

Non-GAAP Legal reserve and landfill operating costs

$ 1.85

-100%

N/A

Non-GAAP earnings per diluted share

$ 0.49

$ 0.56

$ 0.36

-13%

36%

With top line growth we should hope for bottom line growth and we see just that with a 36% increase in earnings when compared to last year. Restructuring costs reduced by 88% and expense from divestitures decreased by 50%, making income from operations increase 17%. Equity in net losses of unconsolidated entities increased 13% while income before income taxes increased 28% for the year. Provision for income taxes increased 15% due to increased revenue. Consolidated net income increased 35%, and after subtracting the income attributable to noncontrolling interests the company has a 36% increase to income attributable to the actual company. Finally, we see the bottom line, and it is a thing of beauty!

Balance Sheet

Balance Sheet (millions)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Cash and cash equivalents

$ 339

$ 58

$ 58

484%

484%

Receivables

$ 1,751

$ 1,810

$ 1,810

-3%

-3%

Other

$ 445

$ 631

$ 631

-29%

-29%

Total current assets

$ 2,535

$ 2,499

$ 2,499

1%

1%

Property and equipment

$ 12,170

$ 12,344

$ 12,344

-1%

-1%

Goodwill

$ 6,068

$ 6,070

$ 6,070

0%

0%

Other intangible assets

$ 503

$ 529

$ 529

-5%

-5%

Other assets

$ 1,166

$ 1,161

$ 1,161

0%

0%

Total assets

$ 22,442

$ 22,603

$ 22,603

-1%

-1%

Accounts payable, accrued liabilities, and deferred revenues

$ 2,141

$ 2,288

$ 2,288

-6%

-6%

Current portion of long-term debt

$ 1,216

$ 726

$ 726

67%

67%

Total current liabilities

$ 3,357

$ 3,014

$ 3,014

11%

11%

Long-term debt, less current portion

$ 8,978

$ 9,500

$ 9,500

-5%

-5%

Other liabilities

$ 4,068

$ 4,087

$ 4,087

0%

0%

Total liabilities

$ 16,403

$ 16,601

$ 16,601

-1%

-1%

WM stockholders' equity

$ 5,737

$ 5,707

$ 5,707

1%

1%

Noncontrolling interests

$ 302

$ 295

$ 295

2%

2%

Total equity

$ 6,039

$ 6,002

$ 6,002

1%

1%

Total liabilities and equity

$ 22,442

$ 22,603

$ 22,603

-1%

-1%

The balance sheet didn't have much movement from last year. Cash and cash equivalents increased 484% from the prior year while other current assets decreased 29% causing total current assets to increase by 1% but to counter that, total assets decreased by 1%. The current portion of long-term debt increased 67% causing total current liabilities to increase 11% and total liabilities decreased 1%.

Conclusion

The company reported earnings which were 36% higher than a year ago on slightly higher revenue while the share price was up 2.88% since the last earnings call excluding dividends. Net profit margin increased 36%. The company increased guidance for free net cash flow by a range of $0.1-0.2 billion. With respect to earnings guidance however the company threw out the idea that due to winter seasonality it was going to be difficult to predict business trends. But they did say that if April is any indication it will be a normal upturn and will adjust guidance for the year after second quarter. The share count has remained the same from the prior year. I love that earnings and revenue increased on a yearly basis. The results were great to me, and investors seem to think they were good as the stock popped 2.02% after reporting while the S&P500 was up 0.17%. That being said, I think the stock is fairly valued. I like to see year over year increase in earnings and revenue and with these results the stock is going to be on my team, and in the starting lineup.

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!

Source: Waste Management Turns Trash Into Excellent Earnings