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by Ahmed Isthiaq

Waste Management (NYSE:WM) stock has been trading between $30 and $40 since the start of 2011. There were occasional dips and hikes, but the stock never breached the $40 mark. In the previous five years, revenues and net income for the company have been close to $13 billion and $1 billion, respectively. Although the waste keeps on increasing, the company seems to be unable to increase its revenues substantially. However, the industry is still expanding, and there need to be new ways to exploit this growth in the industry.

According to the EPA, the average American will dispose around 90,000 lbs of trash in their lifetime. In the first six months of the year, WM earned 82 cents per share and paid out 71 cents in dividends. The company used $900 million in investments and about $330 million on dividends from $1.1 billion of cash flows it generated. The company pays attractive dividends, but the payout ratio for WM is quite high. High dividend yield is an important factor for WM investors.

Future Growth To Come From Energy Segment:

Waste Management is also involved in energy generation through its subsidiary, Wheelabrator Technologies Inc. The subsidiary currently has seventeen facilities and has the capacity to process 23,000 tons of solid waste every year, and generate 669 megawatts. Further, its massive number of landfills provides it access to a lot of trash and in turn to a lot of landfill gas. In the previous year, WM's landfill gas to energy facilities generated the equivalent of 615 megawatts of power.

However, the potential is significantly greater than the current capacity. Waste Management collected 112 million tons of trash during the past year, but about 82% of that waste is put into dumps and wasted. It may sound a bit odd that I am saying waste is being wasted, but it is true. If the waste is used to generate energy and other materials, it can be worth over $40 billion a year. Over the past three years, Waste Management has bought stakes in companies that turn trash into a source of transportation fuel, power and specialty chemicals. All of it is worth more than trash buried underground.

Recent investments made by the company indicate that it is trying to expand into lucrative conversion technologies. The company burned about 7.1 percent the garbage to generate electricity last year, and recycled 12 million tons of trash worth $1.58 billion in revenue. According to the estimates, the entire stream would generate about $12 billion a year.

Benefit Of Size:

Waste Management's size gives it a competitive advantage. Waste Management enjoys considerable barriers to entry, dominating landfill ownership with a large number of sites. Total numbers of landfills across the United States are decreasing as environmental standards become stricter. Waste Management's status as the leading landfills owner gives it an advantage over its competitors. Furthermore, the increased cost and environmental standards make it difficult for new companies to enter the market. Waste Management's supremacy and size make it the leading revenue collector in the industry. Further, the company enjoys substantial pricing power.

Competition:

The main competitors for WM are fellow waste disposal companies Waste Connections, Inc. (NYSE:WCN) and Republic Services, Inc. (NYSE:RSG).

WM

RSG

WCN

HEK

P/E

16.5

15.5

24.1

65.4

P/B

2.40

1.30

2.20

1.20

P/S

1.10

1.30

2.40

1.90

Yield

4.32%

3.17%

1.10%

-

Operating Margin

14.30%

18.20%

19.50%

-4.90%

Net Margin

6.70%

8.30%

10.10%

-6.80%

ROE TTM

14.70%

8.80%

9.90%

-4.30%

Debt to Equity

1.50

0.90

0.50

0.60

Source: Morningstar.com

Republic and WM trade at about the same valuation based on P/E; the trailing P/E for RSG is 15.60 and its forward P/E is 13. Waste Connections is expensive, with a P/E of 23.8, and its yield is also lower than Waste Management. Another player in the market, Heckmann Corporation (HEK), is also establishing itself. After the merger with Power Fuels, HEK has also acquired a majority stake in Appalachian Water Services, LLC. Heckmann multiples and margins are not impressive at present, but the company has enormous growth potential. However, for the income investor, WM will be the best investment due to its size and stable dividends.

Summary:

Waste Management may prove to be a solid investment due to the need of the waste management industry. Moreover, the massive size of its operations provides the company with considerable advantages. I believe the expansion in the energy and chemicals segment will help increase the revenues for the company. However, while price movements will not be big, the increased revenues and cash flows mean that the company will maintain it dividends. I am confident that the firm will be able to achieve healthy revenue growth through expansions. Waste Management is an ideal long term investment for income hunters.

Disclaimer: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Source: Waste Management: A Good Long-Term Play