Waste Management's Cleaned Up but Still Undervalued - Barron's

Includes: AW, RSG, WM
by: Judy Weil

Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:

For Waste Management, Trash Is Cash by Christopher C. Williams

Summary: From 1998-2000, mismanagement, a bad merger and price wars crippled waste remover and recycler Waste Management (WMI). But WMI has achieved 20% plus earnings growth every year since 2003 by 1) Reigning in a sprawling, international business, reorganizing and excising unprofitable segments. 2) Maintaining a disciplined price-raising strategy. 3) Low debt (55% of capitalization). WMI also has an 18 P/E vs. the industry's 20 P/E norm, and a 7.3 times enterprise value. If values aligned to the industry norm of 8-10, WMI shares would rise 20%. EPS is at $1.81, excluding charges. Operating profit rose to 15.2% from 13.3% last year. WMI generated $2.5 billion in cash in 2006 from $13.4b in revenues-- in a $40b business. Guidance for 2007 is $1.96-$2.00/share. Cash-flush WMI has so far bought back $2b worth of shares, and should raise its 2.4% dividend. Rivals Allied Waste Industries (AW) and Republic Services (NYSE:RSG) have potential, but WMI's yields are higher. Reorganization costs hit Q4 numbers, but some analysts say lower operating costs and higher pricing margins should offset continuing reorganization charges or a weak economy. Barron's Bottom Line: Q4'06 numbers pushed WMI shares down 5% to $35 in Q1. But with steady price increases and numbers just matching projections on Friday's reports, WMI could start climbing to mid-$40's.

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WMI 1-yr. chart:

WMI Investment