Note: All data are as of the close of Friday, November 21, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
While belonging to the Industrial Goods sector, the Waste Management Industry behaves very much like a staple, seeing as it is one of those fairly steady essential services that cannot be done without.
In the simplest of descriptions:
Waste management companies are engaged in providing pollution control and environmental services. These companies are involved in the management, recovery, and disposal of solid and hazardous waste materials, which includes landfills and recycling centers.
The waste management industry can be considered something of an indicator of the state of industrial activity as it is called upon to take out the trash. The more the industrial activity, the more trash it produces. For this reason, waste management companies will suffer a little when industry slows, and will prosper when industry grows.
But there isn't a lot of mark-up in the industry's services, nor is there any variation in the value of its services from one part of the business cycle to the next. It's pretty much the same old business year after year, with just a little change in volume as industrial activity expands or contracts, as graphed below.
From June 2007 to March 2009, where the broader market S&P 500 index [black] fell some 56% and the SPDR Industrials Sector ETF (NYSE: XLI) [blue] fell some 61%, the nation's three largest waste management companies - Waste Management, Inc. (NYSE: WM) [beige], Republic Services, Inc. (NYSE: RSG) [purple], and Stericycle, Inc. (NASDAQ: SRCL) [orange] - performed much better. Where WM and Republic fell some 44% and 47% respectively, Stericycle actually rose some 3% overall.
But just as the industry fell less during the economy's decline, it similarly rose less during the economy's expansion, as graphed below.
Since the economic recovery began in March of 2009, where the S&P has risen 205% and the XLI has risen 270%, WM has grown a mere 118%, Republic has grown just 143%, while Stericycle has grown 172%.
On an annualized basis, where the S&P has averaged 36.18% and XLI has averaged 47.65%, WM has averaged 20.82%, Republic has averaged 25.24%, and Stericycle has averaged 30.35% per year.
Looking forward, the increasing industrial and manufacturing activity in America looks to grow the waste management industry's earnings very robustly near term, with earnings set to expand at some 3.31 to 7.83 times the broader market's average growth rate, as tabled below where green indicates outperformance while yellow denotes underperformance.
Yet such impressive growth is expected to settle down to a more sustainable 1.26 to 1.44 times the market's growth rate.
Zooming-in a little closer, the three largest U.S. companies in the industry are all expected to underperform the broader market S&P over the current and next quarters, with Republic and WM briefly contending with earnings shrinkage.
Over 2015 and the longer term, however, Stericycle looks to outperform both its peers and the broader market average. Since Stericycle caters mainly to the disposal of hospital and other healthcare industries' waste, the company's earnings will likely grow on account of increasing enrolment in medical insurance programs which is expected to increase health facility visitations and patient services.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Stericycle posted the greatest revenue growth year-over-year, while Republic posted the greatest earnings growth. WM, meanwhile, posted shrinkage in both.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Stericycle operated with the widest profit and operating margins, while WM contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Stericycle's management team delivered the greatest returns on assets and equity, while Republic's and WM's teams split the lowest returns between them.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Republic provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while WM's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Republic's stock is the cheapest relative to forward earnings and company book value, while Stericycle's stock is cheapest relative to 5-year PEG. At the overpriced end of the spectrum, Stericycle's stock is the most overvalued relative to earnings and book, while WM's is the most overpriced relative to PEG.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, WM and Republic offer the highest percentages of earnings over their current stock prices for the near term, while Republic offers it for 2015. At the low end of the scale, Stericycle has the lowest percentages for all time periods.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Stericycle offers the greatest growth rate in all time periods, while Republic and WM are expected to suffer some earnings shrinkage near term.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Stericycle's stock offers the least upside potential and greatest downside risk, while Republic's offers the greatest upside and least downside.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Republic is best recommended with 4 strong buys and 2 buys representing a combined 54.54% of its 11 analysts, followed by Stericycle with 8 strong buy and 0 buy recommendations representing 50% of its 16 analysts, and lastly by WM with 2 strong buy and 2 buy ratings representing 30.76% of its 13 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Republic with a decisive lead, outperforming in 11 metrics and underperforming in 5 for a net score of +6, followed by Stericycle, outperforming in 14 metrics and underperforming in 14 for a net score of 0, with WM trailing in the distance, outperforming in 6 metrics and underperforming in 12 for a net score of -6.
Where the Waste management industry is expected to outperform the S&P broader market substantially this and next quarters, and moderately in 2015 and beyond, the three largest U.S. companies in the space are all expected to underperform the broader market near term, with Stericycle advancing to outperform all from 2015 onward.
Yet after taking all company fundamentals into account, Republic Services stands first among its peers given its lowest stock price to forward earnings and company book, highest EBITDA over market cap and revenue, highest diluted earnings per share over stock price, highest trailing earnings growth, highest future earnings over current stock price overall, best high and low price targets and most analyst buy recommendations - decisively winning the Waste Management industry competition.
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