Portfolio Playoffs Wild Card Game: Duke Energy Vs. Waste Management

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Includes: DUK, WM
by: Abba's Aces

Summary

Duke gets past Waste Management in the series and advances to play against Union Pacific.

Duke is a less expensive stock than Waste Management on a fundamental basis hence why the team won.

The winner of this tournament last year, KLA-Tencor, went on to produce a 38.35% gain including dividends versus the S&P 500 which gained 13.1%.

In the first round of the Portfolio playoffs we have #10 seeded Waste Management Inc (NYSE:WM) taking on #7 seeded Duke Energy Corporation (NYSE:DUK). Duke Energy Corp. is an energy company, operating through its direct and indirect wholly owned subsidiaries. Waste Management is a provider of waste management services in North America which collects, transfers, recycles and disposes of waste.

The following table depicts the recent earnings reports for each company:

Ticker

Earnings

Date

Actual EPS

($/share)

Estimated EPS

($/share)

Actual Revenue

($ in billions)

Estimated Revenue

($ in billions)

WM

29Oct14

0.72

0.68

3.6

3.66

DUK

05Nov14

1.40

1.52

6.4

7.21

Waste Management is up 15.38% excluding dividends in the past year (up 18.68% including dividends) while Duke is up 22.56% excluding dividends (up 26.86% including dividends), and the S&P 500 has gained 12.73% in the same time frame. This matchup will be played out in a best of seven game series based on the metrics below. Not all the metrics will be looked at if a team can win and win early. This matchup will determine the winner which will go on to the next round to play against Union Pacific Corporation (NYSE:UNP).

Forward P/E

Forward P/E is the metric of how many times future earnings you are paying up for a particular stock. The earnings portion of the ratio I utilize is the earnings value for the next twelve months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing twelve month P/E ratio because it is an indication of where the stock is going to go in the future. I like to get a glimpse of the future, but will take note of where it was coming from in the past. Duke carries a 1-year forward-looking P/E ratio of 17.79 which is fairly priced for the future right now while Waste Management's 1-year forward-looking P/E ratio of 20.34 is also inexpensively priced. Game 1 goes to Duke.

1-yr PEG

This metric is the trailing twelve month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five year estimated growth rate, however I like to use the one year growth rate. This is because as a former capital projects manager that performed strategy planning for the research and development division of a large-cap biotech company I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one year forecast as opposed to a five year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone. The 1-year PEG ratio for Duke is currently at 4.95 based on a 1-yr earnings growth of 3.97% while Waste Management's 1-yr PEG ratio is 44.4 based on a 1-yr earnings growth rate of 5.05%. Duke takes Game Two away from Waste Management.

EPS Growth Next Year

This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one year earnings growth projection opposed to the five year projection based on what I discussed in the PEG section above. Duke has a projected EPS growth rate of 3.97% while Waste Management sports a growth rate of 5.05%. Waste Management takes the third game of the series.

Dividend Yield

Dividend yield is a no brainer; the higher the better. The dividend yield is the amount of annual dividend paid out by a company in any given year divided by the current share price of the stock. In my portfolio I don't discriminate against stocks as long as they provide excellent fundamental metrics in the form of the forward P/E, the 1-yr PEG and the 1-yr EPS growth rate. Dividends are a way to measure how much cash flow you're getting for each dollar invested in the stock. Obviously, the higher the yield, the better, as long as it is covered by the trailing twelve month earnings. Duke pays a dividend of 3.75% while Waste Management pays a dividend of 2.91%. Duke wrestles away game for and is one game away from clinching the series.

Return on Assets

Return on assets is the metric which shows how profitable a company is relative to its total assets, telling us how efficient a management team is at using its assets to generate earnings. It is best to compare ROA values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. The assets of a company are comprised of both debt and equity. The higher the ROA value, the better, because the company is earning more money on less investment. Duke is showing a 2.1% efficiency rate on their assets while Waste Management is showing 0.5% efficiency. With this victory Duke advances to the next round of the playoffs after beating Waste Management four games to one.

Conclusion

Although Duke beat Waste Management in the series, Waste Management is still a great company for a portfolio. In fact, Waste Management surprised the heck out of me when I saw them in a playoff spot. I haven't done any homework on the stock in quite some time and was very pleased to find that it made a stealth move up into the bracket. Because I am a value investor, the first three matches carried the most importance because they were fundamental metrics and Duke appeared to be the better valuation stock because it has the valuations. After beating Waste Management, Duke advances to the next round to face Union Pacific.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long DUK, WM.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.