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Summary

  • The company reported higher revenues and earnings from a year ago.
  • The stock is fairly valued on 2015 earnings estimates.
  • $45 was acting as strong resistance for the stock, but since it broke above that on larger than average volume I'd look for it to act as support now.

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

"I'm going to stay on the sidelines again in this name for right now." Since that article was published the stock is up 2.15% (but 3.87% of that return came in one day, today, on the back of the earnings report that this article is based) while the S&P 500 (NYSPY) is up 0.38% in the same timeframe. 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 July 29, 2014, and on the surface the results were mixed with the company reporting earnings of $0.60 per share (beating estimates by $0.01) on revenue of $3.56 billion (missing estimates by $50 million). The stock popped 3.87% the day it reported earnings and 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)

Q/Q

Y/Y

2Q14

1Q14

2Q13

Commercial

1%

0%

$856

$846

$855

Residential

1%

-1%

$643

$635

$652

Industrial

11%

3%

$574

$516

$558

Other

14%

29%

$88

$77

$68

Landfill

16%

2%

$732

$632

$716

Transfer

17%

3%

$357

$306

$345

Wheelabrator

-10%

-4%

$206

$230

$215

Recycling

1%

-4%

$351

$347

$366

Other

2%

0%

$396

$387

$397

Inter-company

11%

-1%

$(642)

$(580)

$(646)

Total

5%

1%

$3,561

$3,396

$3,526

The collection side of the business was flat in commercial, industrial, and residential pickups but was up 29% in the "other" segment. The other portion of the trash pickup business accounts for 2.5% of the business so it didn't really contribute much to the top line. Total revenue increased 1% 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)

Q/Q

Y/Y

2Q14

1Q14

2Q13

Revenue

5%

1%

$3,561

$3,396

$3,526

Operations

3%

0%

$2,301

$2,232

$2,311

Selling, general and administrative

-6%

0%

$353

$375

$353

Depreciation and amortization

7%

0%

$339

$317

$339

Restructuring

0%

-50%

$1

$1

$2

Expense from divestitures, asset impairments and unusual items

1650%

218%

$35

$2

$11

Income from operations

13%

4%

$532

$469

$510

Interest expense

-5%

-5%

$(116)

$(122)

$(122)

Interest income

0%

0%

$1

$1

$1

Equity in net losses of unconsolidated entities

44%

63%

$(13)

$(9)

$(8)

Other

-33%

-200%

$(2)

$(3)

$2

Income before income taxes

20%

5%

$402

$336

$383

Provision for income taxes

82%

42%

$180

$99

$127

Consolidated net income

-6%

-13%

$222

$237

$256

Less net income attributable to non-controlling interests

33%

0%

$12

$9

$12

Net income attributable to the company

-8%

-14%

$210

$228

$244

Diluted common shares outstanding

0%

0%

468

466.9

469.4

Earnings per diluted share

-8%

-14%

$0.45

$0.49

$0.52

Non-GAAP asset impairments and unusual items

N/A

-100%

N/A

N/A

$0.02

Non-GAAP partial withdrawal from multi-employer pension plans

N/A

N/A

$0.15

N/A

N/A

Non-GAAP earnings per diluted share

23%

11%

$0.60

$0.49

$0.54

With top line growth we should hope for bottom line growth and we see just that with an 11% increase in earnings when compared to last year. Restructuring costs reduced by 50% but expense from divestitures increased by 218%, making income from operations increase 4%. Equity in net losses of unconsolidated entities increased 63% while income before income taxes increased 5% for the year after the 200% decrease in other income. Provision for income taxes increased 42% due to increased revenue. The increase in taxes however made consolidated net income decrease by 13% from last year. Net income attributable to the company decreased by 14%, which normally would have caused earnings to decrease by 14%, but due to the non-GAAP accounting due to partial withdrawal from multi-employer pension plans we saw an 11% increase to the earnings.

Balance Sheet

Balance Sheet (millions)

Q/Q

2Q14

1Q14

Cash and cash equivalents

-60%

$137

$339

Receivables

3%

$1,797

$1,751

Other

-5%

$421

$445

Total current assets

-7%

$2,355

$2,535

Property and equipment

-1%

$12,031

$12,170

Goodwill

0%

$6,094

$6,068

Other intangible assets

-2%

$493

$503

Other assets

3%

$1,206

$1,166

Total assets

-1%

$22,179

$22,442

Accounts payable, accrued liabilities, and deferred revenues

2%

$2,194

$2,141

Current portion of long-term debt

-35%

$786

$1,216

Total current liabilities

-11%

$2,980

$3,357

Long-term debt, less current portion

0%

$9,011

$8,978

Other liabilities

-1%

$4,041

$4,068

Total liabilities

-2%

$16,032

$16,403

WM stockholders' equity

2%

$5,853

$5,737

Non-controlling interests

-3%

$294

$302

Total equity

2%

$6,147

$6,039

Total liabilities and equity

-1%

$22,179

$22,442

From a balance sheet perspective, on the short-term asset side of the equation we saw a 60% drop in cash and equivalents which made total current assets decrease by 7% on the whole and total assets decrease by 1%. From the liability point of view there was a 35% decrease in the current portion of long-term debt which made total current liabilities decrease 11% and total liabilities decrease 2%.

Conclusion

The company saw earnings increase by 11% thanks in part to the non-GAAP accounting while the share price was up 3.83% between earnings calls. I don't like that earnings were up on a yearly basis due to non-GAAP numbers. The results were just okay to me (earning a B grade from me), but other investors seem to think they were great as the stock popped 3.87% after reporting while the S&P500 decreased in value by 0.45%. The financial engineering plan didn't really work because not enough shares were reduced from the prior year to even register 1%. In my opinion I don't believe the company should be buying back shares anyway as I believe the stock to be fairly valued on 2015 earnings estimates. On the bright side, $45 has been acting as resistance of late but the stock broke through that value on strong volume and I'd look for $45 to act as support now. I'll be a buyer of the stock at these levels if I don't find any other value plays in the portfolio shortly.

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: The author is long WM, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: The Sweet Smell Of Waste Management's Second Quarter Earnings

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