Waste Management's Cleaned Up but Still Undervalued - Barron's

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For Waste Management, Trash Is Cash by Christopher C. Williams

Summary: From 1998-2000, mismanagement, a bad merger and price wars crippled waste remover and recycler Waste Management (WMI). But WMI has achieved 20% plus earnings growth every year since 2003 by 1) Reigning in a sprawling, international business, reorganizing and excising unprofitable segments. 2) Maintaining a disciplined price-raising strategy. 3) Low debt (55% of capitalization). WMI also has an 18 P/E vs. the industry's 20 P/E norm, and a 7.3 times enterprise value. If values aligned to the industry norm of 8-10, WMI shares would rise 20%. EPS is at $1.81, excluding charges. Operating profit rose to 15.2% from 13.3% last year. WMI generated $2.5 billion in cash in 2006 from $13.4b in revenues-- in a $40b business. Guidance for 2007 is $1.96-$2.00/share. Cash-flush WMI has so far bought back $2b worth of shares, and should raise its 2.4% dividend. Rivals Allied Waste Industries (AW) and Republic Services (RSG) have potential, but WMI's yields are higher. Reorganization costs hit Q4 numbers, but some analysts say lower operating costs and higher pricing margins should offset continuing reorganization charges or a weak economy. Barron's Bottom Line: Q4'06 numbers pushed WMI shares down 5% to $35 in Q1. But with steady price increases and numbers just matching projections on Friday's reports, WMI could start climbing to mid-$40's.

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WMI 1-yr. chart: