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Waste Management Inc. (WM) is the largest integrated waste services provider in the U.S., operating 271 active landfills and 294 transfer stations. Waste Management also operates 22 waste-energy plants that produce renewable energy through its Wheelabrator segment. Waste Management's dominance in landfill ownership and its massive scale in collection routes are creating efficient waste streams that funnel volumes to valuable landfill space, which is under strict environmental regulation. Waste Management's core business generates strong cash flow through its collection segment and pricing power at landfills, providing necessary, much needed services to residential, commercial, and industrial customers. We expect Waste Management to continue its dominance in the waste management industry and its cash flow is highly secured even in all kind of economic environment.

Earnings and Fundamentals Overview

On Oct. 31, 2012, Waste Management reported its third quarter results with adjusted net income of 61 cents per share, beating mean estimates of 60 cents per share. However, the revenue fell 1.7% to $3.46 billion, below analysts' expectations of $3.51 billion, from the year-earlier quarter, as reported by Derek Hoffman from Wall St. Cheat Sheet. Below is the direct quote from David P. Steiner, President and Chief Executive Officer of Waste Management,

The third quarter saw some good and improving trends. We saw improvement in both our internal revenue growth from collection and disposal yield and work-day adjusted volumes. Collection and disposal yield improved sequentially for the first time in six quarters, and we saw positive internal revenue growth from both yield and volume in our MSW, C&D and special waste landfill operations. Our overall income from operations margin, as adjusted, improved by 30 basis points despite a significant decline in commodity prices.

Commodity price declines in our recycling and waste-to-energy operations led to a $0.10 year-over-year earnings per share negative impact in the third quarter. We anticipate another $0.04 per share of headwinds in the fourth quarter. So, the total headwinds for the second half of the year related to commodities are estimated to be $0.14 per diluted share, or $0.07 higher than we previously anticipated at the end of the second quarter. I am pleased that we were able to produce strong quarterly results in the face of these headwinds.

While Waste Management is on the right track with the improvement in its core business from collection and disposal, the declined commodity price had brought negative impact to Waste Management's earnings. In the near-term, Waste Management may continue to be negatively impacted by the commodity price with the uncertain economy; however, our focus will continue and remain to be Waste Management's core business and its cash flow.

Below, we will look into Waste Management's fundamental key stats as compared to its peers in the waste management industry.

Key Stats

Waste Management Inc.

Industry Average

Price/Earning ttm

16.6

25.5

Price/Book

2.5

1.7

Price/Sales ttm

1.1

1.3

Revenue Growth (3 Yr Avg)

0.0

-22.2

EPS Growth (3 Yr Avg)

-2.3

16.5

Operating Margin % ttm

14.3

12.7

Net Margin % ttm

6.7

5.3

ROE ttm

14.7

8.7

Debt/Equity

1.5

3.1

Source: MorningStar

While Waste Management is suffering a negative EPS growth, -2.3 for the past 3 year average, its stalled revenue growth is better than the -22.2 decline for the industry average. Waste Management's operating margin and net margin of 14.3% and 6.7% are all showing stronger numbers than the industry averages of 12.7% and 5.3%. With Waste Management's higher than average ROE of 14.7, as compared to the average of 8.7, along with the lower than the average debt-to-equity of 1.5, Waste Management has the most solid fundamentals in the industry. With P/E of 16.6 and P/S of 1.1, as compared to the averages of 25.5 and 1.3, we believe Waste Management is currently under-valued with its leading position in the market.

Short-term Technical Analysis

On Wednesday, Waste Management closed at $32.74 with 0.61% gain, with the volume of 3.65M, which was 11.6% more than the 30 day average of 3.27M. The share price reached intra-day high of $33.40 before the earnings release at 10AM, which was followed by the gradual decline throughout the day. In the past 52-weeks, Waste Management had been trading in the range of $29.77 to $36.35. Since Oct. 8, the MACD (12, 26, 9) indicator had been showing a bullish sign for Waste Management. On Wednesday, Waste Management broke through its 50-day MV of $33.03 and tested its 200-day MV of $33.33, before the earnings release; however, by closing at $32.74, Waste Management fell back below both 50-day and 200-day MV. From the momentum perspective, RSI (14) at 53.3 indicated the slowed momentum. In the near-term, the resistance points are $33.80 (pivot point, R1), followed by $35.52 (pivot point, R2) if Waste Management can break and stay above its 50-day and 200-day MV. Next support can be found at $31.11 (pivot point, S1)

Source: StockCharts.com

Options Play

In the long-term, we are confident about Waste Management's strong cash flow and its continued dominance in the waste management industry. In the short-term, if Waste Management can break and close above 50-day and 200-day MV, a nice rebound should be seen for Waste Management. We will review a bull credit put spread for the investors who have plan to acquire Waste Management at a discounted price.

  • Short 1x Jan. 19, 2013 Put at the strike price of $31.00 for the credit of $0.50
  • Buy 1x Jan. 19, 2013 Put at the strike price of $29.00 for the cost of $0.20

The maximum profit will be $0.30 and the maximum risk/margin required is $1.7. If Waste Management fails to hold above $31 on Jan. 19, we will acquire Waste Management stock at the cost of $30.7, which gives us an edge of 6.23% as compared to the current price of $32.74, for near 3 months of investing period. However, if Waste Management closes above $31 upon options expiration, a return of 17.65% for the margin used will be earned without acquiring the stock. This options play can be reviewed for investors who are comfortable and interested in Waste Management's current 4.34% annual dividend yield as this options setup also provides downside protection.

Note: All the prices are quoted from the closing of Oct. 31, 2012 and all calculations are before fees and expenses. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Source: Waste Management: Solid Cash Flow Through This Simple Business Model, Collects And Disposes