Waste Management: Boring, But Solidly Profitable

According to Peter Lynch, author of One Up on Wall Street, sometimes you can find profitable companies in overlooked industries. Companies in these industries are often boring and do not garner as much attention as flashier industries like technology or energy. One of these industries is the garbage industry. The garbage industry contains a company that I would consider a Buffett-type investment opportunity.

Waste Management (WMI) is the market leader in trash collection, disposal and recycling services in the US. The company operates in an industry with a high barrier to entry as the garbage industry is extremely capital intensive. Waste Management provides a service that has been needed in the past and will continue to be so for the foreseeable future.

The company’s stock currently trades at $28.60 per share which is relatively cheap based on it PE of 14 which is well below the industry average. Waste Management has a forward PE of 13 per share based on 2010 expected earnings which are just below $2.20 per share. The company has done an admirable job of achieving strong stable earnings growth historically. Waste Management has strong pricing power. Even in this recessionary environment the company’s prices rose as overall volume declined. EPS and ROE are much higher then industry competitors.

Earnings are expected to grow in the double digits over the next 5 years at a rate of 11% per annum. Return on Equity is in the double digits as well at an impressive 17.4%. Waste Management pays a healthy dividend of $1.16 which amounts to a generous 4.1% yield. The company is almost worth buying on the merits of its dividend alone.

Waste Management should be one of the primary beneficiaries of any form of economic recovery. As the economy improves, Waste Managment should see an uptick in trash pickups along with improved demand for recycled materials.

Comments

[bbowen7]

One of the problems with this industry is the corruption that is required to obtain local government monopoly contracts. It probably isn't a ROI concern, but it does put these companies into the realm of the "sin industries". There is an effort at rebranding as "alternative energy" companies, but the reality is what it was.

[mdpath]

A great company but its been a lousy stock.

[David Waserstein]

You didn't even mention the alt energy aspect even though the report is filed under Alt Energy... ???

The company is very involved in the generation of syngas from landfill.